The effect of intrinsic, extrinsic cues and reference prices on buyers' perceptions of quality and value

Abstract

This dissertation research synthesizes knowledge from consumer behavior, psychology and applied economics to address a fundamental issue in marketing regarding how buyers evaluate products. Classical economic theory has assumed that buyers have perfect information about products and prices and that buyers are capable of processing this information. However, in reality, buyers face an increasingly complex marketplace with numerous products, incomplete and imperfect information, and a limited capability of processing this information. Hence, this complex market place creates an uncertain environment in which buyers have to make purchase decisions. To reduce uncertainty, buyers tend to use available information cues to make inferences about the products being evaluated. Among these cues are the product’s price, reference price (e.g., price last paid, advertised reference price), and certain attributes intrinsic to the product. The research question addressed in this dissertation is, “how do information cues affect buyers’ product evaluations, behavioral intentions and price estimates?” Conceptually, this research develops a model incorporating the research objectives by describing how buyers select specific information cues, evaluate them, and arrive at an overall assessment of the value or worth of the product to them. Specifically, the model proposes that the price cue is used both as an indicator of product quality as well as an indicator of monetary sacrifice. It is proposed that buyers initially trade-off these opposite indicators to make an assessment of the value of acquiring the product. However, complicating this model is the notion that some product attributes produce benefits quite apart from quality, and that some price offers represent a short-term deal or bargain. Since buyers are assumed to have an internal reference price that may be used to evaluate a price offer, additional value, called transaction value, may be perceived if the offer price is below this reference price. Further, additional value may occur because, intrinsic attributes of the product may provide additional benefits. Furthermore, the model conceptualizes that the perceived value of the offer has a positive effect on buyers purchase intentions and the greater the transaction value, the less their search intention for a lower price. The model proposes specific linkages between these variables and suggests a process of how buyers evaluate product alternatives. To test this model and its propositions, an experiment was conducted. Respondents evaluated a 35mm compact camera given variations in the amount and type of information available for this evaluation. To enhance the reliability of the measures and manipulations, multiple items were used to measure the theoretical constructs. Because of the laboratory setting for the research, emphasis was placed on the precision and control of the procedures and on maximizing the internal validity of the study. A confirmatory factor analytical computer program was used to assess the measurement properties of the scales. Certain relationships were tested utilizing analysis of variance procedures and contrast analysis. The structural model specifying the causal relationships among the variables was analyzed using LISREL VI (a linear structural equation computer analytic program). The LISREL output statistics provided parameter coefficients for the individual relationships, as well as goodness-of-fit of the structural/causal model. The results of this research contribute to our understanding of the way imperfect information affects the efficiency of market operations. Understanding how buyers utilize imperfect information to make economic evaluations provides important information on how they make actual purchase decisions. Additionally, it provides information of how price offers affect buyers’ buyers’ product evaluation and purchase intention. Such knowledge will be useful to managers.