K. Chang et al., The impact of heterogeneity in purchase timing and price responsiveness onestimates of sticker shock effects, MARKET SCI, 18(2), 1999, pp. 178-192
The notion that individuals have an internal reference price against which
they compare observed prices is well supported by several psychological the
ories. Empirically, several papers in the marketing literature, employing s
canner panel data, have modeled the impact of reference prices on brand cho
ice via the sticker shock formulation, in which consumers evaluate choice a
lternatives using differences between shelf prices and reference prices. Mo
st of the studies reported thus far have not accounted for heterogeneity in
price response among consumers and have typically imputed reference prices
from the shelf prices of brands that a consumer is supposed to have "obser
ved" on previous purchases in the category. Since category marketing activi
ty can differentially affect the purchase timing of households, we argue th
at this measure of reference price may follow certain systematic patterns a
cross consumers and, when combined with unaccounted for price response hete
rogeneity, may result in a spurious sticker shock effect. Specifically, we
show that estimates of sticker shock are biased upward if households that a
re price-sensitive in the brand choice decision are also more responsive to
category promotion activity in their purchase timing decision.
We discuss some general conditions under which the bias occurs and conduct
a simulation experiment to confirm our specific hypotheses. Our simulation
results show that changes in purchase timing are a critical determinant of
the bias in the sticker shock effect. We also show that unaccounted for pri
ce response heterogeneity can in itself result in a biased sticker shock pa
rameter; however, this requires very large differences in price sensitiviti
es across consumers, far greater than what is normally observed.
We develop a hierarchical Bayes version of the nested legit model, which mo
dels heterogeneity via individual-level parameters in a continuous random e
ffects framework. We estimate the model on scanner panel data from the yogu
rt and ketchup categories. We find, in both categories, that the 95% probab
ility interval of the posterior distribution of the mean sticker shock coef
ficient contains the value zero. Therefore, at least for the data used in t
his study, there is no evidence for the sticker shock effect at the aggrega
te level. In contrast, the corresponding coefficient from a standard model
(which ignores this heterogeneity) is highly significant and supports the e
xistence of a (possibly spurious) sticker shock effect. Consistent with our
explanation of the underlying cause of the bias, households that are more
price-sensitive in the choice decision are also found to be more responsive
to category promotion activity in their decision to purchase in the catego
ry.
The results highlight the measurement problems associated with imputing ref
erence prices from past prices. Since the frequency, duration, and price le
vel of a retailer's promotional program depend on its size and prevalence,
accurate estimates of the sticker shock effect are essential for formulatin
g optimal promotion strategies. An adequate accounting of consumer heteroge
neity is critical to this effort.