Academic journal article International Journal of Marketing Studies

The Z-Effect: Why Good Is Good, but Better Is Better

Academic journal article International Journal of Marketing Studies

The Z-Effect: Why Good Is Good, but Better Is Better

Article excerpt

Abstract

Most preference construction research studies the response mode of choice. While such research is important, relatively little preference construction research has addressed the implications of constructing willingness to pay. Understanding willingness to pay is important for pricing because choice does not necessarily produce the same results or insights as willingness to pay. This research begins to extend the current literature on the construction of willingness to payby investigating how it is influenced by the dispersion of quality in product menus. Two experiments demonstrate that willingness to pay is influenced by relative quality (i.e., an alternative's quality relative to other alternatives in the menu). Specifically, these two experiments demonstrate that willingness to pay for an alternative in a menu can be manipulated without changing the objective quality of those alternatives because willingness to pay is correlated with an alternative's quality z-score. This result is an artifact of the difficulty of translating psychological values (preferences) into numerical values (willingness to pay) combined with the comparative nature of the menu context.

Keywords: willingness to pay, preference construction, relative quality, quality dispersion

1. Introduction

1.1 Problem Introduction

When purchasing an iPad at Apple.com, shoppers are faced with three levels of quality that vary by the amount of internal memory installed-16 GB, 32 GB, and 64 GB. A wealth of research on preference construction can provide important insights into which level of memory is likely to be chosen. However, what can the research to date say about how much shoppers will be willing to pay for each of these options? Furthermore, if Apple offered instead a menu of 16 GB, 48 GB, and 64 GB, or a menu of 16 GB, 24 GB, 48 GB, and 64 GB, would these different menu configurations produce different levels of willingness to pay for the 16 GB and 64 GB configurations that are present in all three menus? This is the question investigated here.

1.2 Relevant Scholarship on Preference Construction

Much of the research on preference construction-the idea that people construct their preferences when faced with a choice rather than constantly maintaining a master list of preferences in memory (Bettman, Luce, & Payne, 1998)-focuses on the response mode of choice. For example, it is the main dependent variable in many demonstrations of preference reversals (Grether & Plott, 1979; Lichtenstein & Slovic, 1971; Tversky, Slovic, & Kahneman, 1990) and in a large literature on "context effects," including the similarity effect (Tversky, 1972), the attraction effect or asymmetric dominance (Huber, Payne, & Puto, 1982), the compromise effect (Simonson, 1989), and tradeoff contrast and extremeness aversion (Simonson & Tversky, 1992) (See Heath & Chatterjee (1995) for a listing of studies up to that point).

Some work on preference construction has also investigated other response modes such as willingness to pay (Birnbaum & Sutton, 1992; Cox & Grether, 1996; Lichtenstein & Slovic, 1971), but the amount of preference constructionresearch studying this response mode is significantly less than that of choice (one major exception here is the significant literature studying willingness to pay for public goods, otherwise known at contingent valuation (Venkatachalam, 2004)).

More research is needed to understand how preference construction influences estimates of willingness to pay. This is true for a number of reasons: first, choices do not necessarily produce the same results as willingness to pay judgments do,because judgments do not necessarily require the same level of commitment as choice (Ganzach, 1995), and because attribute weights can be enhanced when the attribute is compatible with the mode of response (Slovic, Griffin, & Tversky, 1990). Second, the discrete nature of choice makes it difficult to observe the underlying value function needed by firms to price their products. …

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