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A Reference price model with probabilistic thresholds

Authors Han, Sangman
Gupta, Sunil
Lehmann, Donald R.
Issue Date 1993-12
Summary This paper incorporates probabilistic thresholds into the reference price model within which consumers feel a positive transaction utility from gain only if the observed price is lower than its reference price level by at least some threshold value. Similarly, consumers feel a negative transaction utility from loss only if the observed price is higher than its reference price level by at least some threshold value. We model the thresholds for gain and loss as probabilistic variables and we allow the thresholds to vary by brands, across consumers and over time. By incorporating the probabilistic thresholds for gain and loss, we describe the fuzziness of the cut-off points for the transaction utility. We apply the proposed model to ground caffeinated coffee data from IRI. The results of model calibration show that the proposed model significantly improves the model fit compared to the existing reference price models, and that the thresholds vary quite significantly over time and across consumers. Discussion of the results is provided.
Language English
Format Working paper
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