Impact of Reference Prices on Product Positioning and Profits

By Mehra Amit, S Sajeesh S, Sudhir Voleti
Production and Operations Management | April 2020

DOI

doi.org/10.1111/poms.13144

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Citation

Mehra Amit., Sajeesh S, S., Voleti, Sudhir. Impact of Reference Prices on Product Positioning and Profits Production and Operations Management doi.org/10.1111/poms.13144.

Production and Operations Management, 2020

Abstract

The existence of reference price effects in consumer decision making is well documented in prior research, but few studies focus on its implications for firms' strategic behavior. Using a competitive model, we address this gap by examining how firms' product positioning and advertising strategies in a non-durable goods market (where consumers repeatedly purchase products from the category) are affected compared with a benchmark situation in which reference price effects are not pertinent. We find that as the salience of reference price effect increases, (a) initially prices are higher than, but eventually they fall below, the benchmark prices; (b) product differentiation first decreases and then increases compared with the benchmark; and (c) firm profits first decrease and then increase, but always remain less than, the benchmark profits. Using price advertising as a way to increase the reference price, this study shows that such an intervention potentially improves firms' profits above the benchmark profits. The underlying reason is that the reference price effect influences price competition, which incentivizes firms to change their product positions, which then again impacts firms' prices.

Sudhir Voleti is an Associate Professor of Marketing at the Indian School of Business (ISB), where he is also a distinguished faculty member in Business Analytics. A renowned researcher in the fields of marketing research and business analytics, he has previously served as Associate Dean of Faculty Alignment and the Registrar's Office (FARO) at ISB.

Professor Voleti holds a PhD in Marketing and an MS in Applied Statistics from the University of Rochester, a PGDM from Indian Institute of Management (IIM) Calcutta, and a BE from the Birla Institute of Technology, Ranchi, along with years of industry experience.

Professor Voleti is recognised as one of India's leading data science academicians. His research focuses on combining data with econometric and statistical methods to explain phenomena of marketing interest such as evolution in the equity of brands across time, valuation of brands using secondary sales data, the sales impact of geographic and abstract distances between products and markets, and the performance, productivity, and benchmarking of salesforce organisations.

Professor Voleti has published numerous research articles in leading academic journals such as Management Science, Journal of Marketing, Journal of the Royal Statistical Society, the International Journal of Research in Marketing, and the Journal of Retailing, as well as book chapters and articles in the popular media. He also serves on the editorial review boards of numerous journals. Some of his significant works include "Impact of Reference Prices on Product Positioning and Profits", "The role of big data and predictive analytics in retailing", "Why the Dynamics of Competition Matter for Category Profitability", "A Bayesian non-parametric model of residual brand equity in hierarchical branding structures", and "An Approach to Improve the Predictive power of Choice - Based Conjoint Analysis".

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