Monday, February 20, 2012

BRUNO Hernan A., CHE Hai, DUTTA Shantanu
Role of Reference Price on Price and Quantity: Insights from B2B Markets
INSEAD Working Paper 2012/25/MKT

We study the role of reference price in a setting where both the price and the quantity are set through personal interaction during the transaction process, such as in business-to-business (B2B) markets. Most studies on reference price in the literature have focused on consumer packaged goods where prices are typically fixed during the shopping trip and the transaction does not involve personal interaction with a salesperson. In this paper, we study the effect of reference price on the quantity purchased and also on the pricing outcome of the transaction. We estimate a simultaneous equation system of both pricing and quantity purchased. We find that: (1) reference price effects exist on quantity purchased and on the transaction pricing outcome in B2B market transactions, (2) business customers react asymmetrically to price increases and price decreases, and (3) Salespeople have their own reference prices that impact the transaction price. We also find that customer experience with the salesperson might exacerbate the loss aversion effect. We discuss the underlying reasons behind these findings and the managerial implications.