From a paper by Marlene Jensen and Ronald Drozdenko, presented at the 2005 Northeast Business & Economics Assn. Conference

How consumers respond to price is due to how close that price is to what the consumer expects. Yet consumers can override their internal reference prices and accept a higher price.

In an experiment, consumers were told to assume they planned to buy an HDTV. With the HDTV, they were offered four different levels of guarantees and four levels of bonuses (including no bonus). Some of the guarantee levels were unusually small (90 days) given the high price, as were some of the bonuses (“no bonuses” or 6 DVDs).

Consumers were randomly assigned to two different groups and each group was exposed to current prices for HDTVs. A following test asked subjects what their expected price range is for the product, and those whose answers were outside the range just provided were dropped from the study. One group then saw offers for HDTVs priced within their expected range. The other group saw a price higher than they expected.

It was expected that the group seeing the higher price would react more positively to the lower levels of “add-ons” as justification for buying at the higher price.

This expected difference was found for the lower levels of guarantees, where 90-day and 180-day guarantees were more appealing to the group that saw the higher-than-expected price than to the expected-price group.

Bonuses, however, did not exhibit this expected difference. The high-priced group was more attracted to the no-bonus offer and less attracted to the poor bonus offer (just 6 DVDs).

Differences by age and group

The same differences were shown when consumers were segmented by age and gender. There were no significant differences between males and females in this study. The age segments supported the overall findings for the guarantees. But the 30+ age group showed significantly higher attraction to the no-bonus offer and significantly less for the home-theatre-system offer.

Effect of brand on higher-than-expected prices

Some studies show consumers are more likely to discredit an unusually high price for a familiar brand than for an unfamiliar one.

These findings were confirmed by our study, which also found a significant difference between brand and acceptance of the higher price. Here the group seeing the higher-than-expected price had a more positive intent-to-buy with a fictitious brand than did the group seeing a price within their expectations.