When Do Higher Prices Increase Demand? The Dual Role of Price in Consumers' Value Judgments
Business Administration, Management, and Operations
Organizational Behavior and Theory
Sales and Merchandising
Drawing on literature on judgment and decision-making, we examine the proposition that price serves two distinct roles in consumers' value judgments. First, as a product attribtute, price affects the perceived similarity of the target product to the mental prototype of a higher or lower quality product. However, price is not the only attribute used to make similarity based quality judgments. Other relevant and available product attributes moderate the effect of price on quality judgments. Second, as a measure of sacrifice, price serves as the benchmark for comparing utility gains from superior product quality. However, this comparison process is dynamic because the relative importance of money and product quality changes across consumption occasions. We present a signal detection model of consumer's price-value judgment to explain how high prices simultaneously increase as well as decrease purchase intentions. We describe how managers can use this model of value judgment to identify situations when higher price may increase demand.