By: Staff Writer

October 5, 2006, U.S. News & World Report

To Buy or Not to Buy

The sorbet is cheaper, but the cake looks better. Then again, should you get dessert at all? A new study finds that "parity pricing" dramatically increases the chances of a consumer's making a purchase.

Study: "Differentiation and Parity in Assortment Pricing"

Authors: Alexander Chernev, Kellogg School of Management

Status: Published, Journal of Consumer Research, September 2006.

Summary: The sorbet is cheaper, but the cake looks better. Then again, should you get dessert at all? A new study finds that "parity pricing"–when all products are priced the same–dramatically increases the chances of a consumer's making a purchase.

You're ordering dessert and know exactly what you want–the lavender crème brülée that was reviewed in your favorite food column. Even if it's the most expensive item on the dessert menu, you'll probably order it. But what about those times when you don't come armed with advance recommendations? A study in the September issue of the Journal of Consumer Research by Alexander Chernev, associate professor of marketing at the Kellogg School of Management, finds that when a person is unsure what to choose, pricing all items the same–known as "parity pricing"–can help ease the decision-making process. In other words, parity pricing may increase the likelihood that the diner will order dessert at all.

"Most prior research has examined the impact of assortment on choice, irrespective of price or by explicitly assuming parity pricing," writes Chernev. "In contrast, this research documents that price differentiation can have a significant impact on choice and links this impact to preference uncertainty and the consistency between individuals' consumption and resource-allocation preferences."

Chernev compares parity pricing with differential pricing (pricing all items differently based on factors such as the cost of ingredients). He finds that differential pricing can both help and hinder the decision-making process, since it makes cost a crucial factor and introduces the idea of splurging or saving.

If items in the desired price range include an item with other appealing qualities, the decision is made easier by the price differential. However, if the items in that price range are less desirable than more expensive items in some way, the consumer becomes conflicted about buying anything at all.

"Thus, when the consumer has readily formed consumption preferences, differential pricing will 'help' choice when the most preferred option is also the least expensive and will 'hurt' choice when the most preferred option is the most expensive," writes Chernev.

Start Low, Sell High

Conventional wisdom has it that if you want to sell something, you'll get more if you ask for more. In the evolving world of online auctions, though, the opposite seems to be true. The best way to sell high on eBay, a new paper argues, is to start low.

Study: "Starting Low but Ending High: A Reversal of the Anchoring Effect in Auctions"

Authors: Adam Galinsky and Keith Murnighan (Kellogg School of Management, Northwestern) and Gillian Ku (London Business School)

Status: Published, Journal of Personality and Social Psychology, July issue.

Summary: Conventional wisdom has it that if you want to sell something, you'll get more if you ask for more. In the evolving world of online auctions, though, the opposite seems to be true. The best way to sell high on eBay, a new paper argues, is to start low.

Most people hold the belief that if they ask for more, they will get more. As a result, people expect that as sellers, setting a high starting price will bring them a higher final price, which has been confirmed by research in buyer-seller negotiations–sellers reap financial benefits when they ask for more.

However, the same is not necessarily true in auctions such as those on eBay. A new study published in the July issue of the Journal of Personality and Social Psychology by Adam Galinsky and Keith Murnighan of the Kellogg School of Management at Northwestern University and lead author Gillian Ku of the London Business School find evidence to counter this "start high, end high" mantra. Using a variety of consumer items auctioned on eBay, such as Nikon cameras and Michael Jordan shirts, along with laboratory experiments, they found that in the social setting of auctions, lower starting prices can result in higher final prices.

"Our research has shown that in buyer-seller negotiations, the starting price acts as an 'anchor' that psychologically limits and constrains counteroffers," said the Kellogg School's Galinsky. "Auctions, on the other hand, are social settings with different dynamics. Unlike buyer-seller negotiations, in which the number of parties is fixed, the number of potential bidders in auctions is basically unlimited and influenced by the starting price."

Economically, low starting prices allow more interested bidders to make initial bids in a seemingly low-cost environment. With more bidders, the probability of higher prices goes up. More important, low starting prices also start two different psychological processes.

The people who enter into the auction early start to invest time and energy, creating "sunk cost," and the research shows that people try to recover their sunk cost by bidding more, in essence trying to justify their past bids. Second, the research shows that more bids and more bidders imply the item is valuable and is worth bidding on. Thus, bidding causes even more bidding.

Although the research found many reasons that starting low will help the seller get more in the end, there are instances when it is not always better to set lower starting prices in auctions. Whenever there is a barrier to entry or few interested buyers, low starting prices will lead to lower final prices.

"In the Bay Area of California, houses routinely sold for higher than the list price in the past 10 years because there are so many interested buyers," said the London Business School's Ku. "However, houses in less desirable locations will have fewer prospective buyers and will be less likely to generate traffic, suggesting that low starting prices in these low-traffic auctions will produce low final prices."

The research suggests the following for sellers: In a one-on-one negotiation, set high starting prices. However, in an auction with a large set of potential buyers, set low starting prices, and in an auction with few interested buyers, set a high starting price and possibly negotiate with prospective buyers.

Pardon the Interruption

Companies pay top dollar to get advertisements in "premium" spots near the end of TV programs. But that system may not work so well after all. A new study finds that the more consumers are absorbed in the narrative flow of a story, the more likely they are to resent the ads that disrupt it.

Study: "Media Transportation and Advertising"

Authors: Bobby Calder (Kellogg School of Management, Northwestern) and Jing Wang (University of Iowa)

Status: Published, Journal of Consumer Research, September 2006

Summary: Companies pay top dollar to get advertisements in "premium" spots near the end of TV programs. But that system may not work so well after all. A new study finds that the more consumers are absorbed in the narrative flow of a story, the more likely they are to resent the ads that disrupt it.

A new study in the September issue of the Journal of Consumer Research shows that the more consumers are absorbed in the narrative flow of a story–a process known as "transportation"–the less likely they are to respond positively to advertisements. These findings have interesting implications for advertisers, many of whom pay more for "premium" ad placement that may actually discourage consumers.

"Media create the audience for most advertising. Consumers come to a medium for its content," explains Bobby Calder of the Kellogg School of Management and Jing Wang of the University of Iowa. "If the ad interrupts the transportation experience, this in itself creates a negative experience associated with the ad."

When the story is personally relevant to the reader, these effects are increased. Conversely, ads that are relevant to the reader's personal goals are seen as the most intrusive. However, absorption in a narrative does not always cause the reader to view ads negatively. The researchers found that absorption in a story can enhance the effect of advertisements–if they appear after the story has ended.

"Transportation can have both negative and positive effects on advertising," write the authors. "If an ad does not interfere with this process, say by occurring after the story is completed, the positive experience of transportation will be associated with the ad."