The Impact of the Perceived Variance of Price Sequences on Choice

1. The Impact of the Perceived Variance of Price Sequences on Choice Eric Dolansky, Brock University Kyle Murray, University of Alberta Mark Vandenbosch, Ivey School of Business

2. Uncertain Outcomes • When there is uncertainty or ambiguity about an outcome, individuals tend to try to avoid risk and pay to do so • Example: fixed vs. floating interest rates • While pricing models include prices over time, they tend to smooth out variability • Existing pricing models do not incorporate the ability to make future price predictions Dolansky, Vandenbosch & Murray

3. Price Sequences • Price sequence: a series of prices as observed over time by a consumer • Example: Gas prices • All of the individual prices over time: series • Those observed and remembered by a consumer: sequence • Price sequences are becoming more common and accessible, due to dynamic pricing and the internet Dolansky, Vandenbosch & Murray

4. Theoretical Background • Uncertainty and Ambiguity • Reference price • Behavioral Pricing • Sequences of Events Dolansky, Vandenbosch & Murray

5. Basic Procedure for all Studies • Experiment was set up as a business buying decision • Participants had to choose between two vendors of ‘transportation services’ • Information about transportation services was provided, e.g. fluctuating prices • Past price information was presented, one price at a time, 26 prices per vendor • Participants chose based on this information Dolansky, Vandenbosch & Murray

6. Study One - Design Initial exploration of the price sequence • 2 (direction of trend) x 2 (order) design • All participants viewed the zero-slope sequence • The ascending and descending sequences were each viewed by half of the participants • Sequences were randomly generated from a set distribution; all have equal variances Dolansky, Vandenbosch & Murray

7. Study One Price Sequences Dolansky, Vandenbosch & Murray

8. Price E-mail Dolansky, Vandenbosch & Murray

9. Choice Shares From Study One *p < 0.1; **p < 0.01; ***p < 0.001 (Binomial test of a difference from a 50% split) Dolansky, Vandenbosch & Murray

10. Study One Findings • The ascending sequence was preferred to the zero-slope sequence • The descending sequence was not • Non-zero slope sequence was a significant predictor of preference • There was a significant order effect Price sequences matter; people made sub-optimal choices based on the sequence Dolansky, Vandenbosch & Murray

11. Study Two What do participants know and remember when making the decision? • Memory could have been an issue • Same basic design as study one • Before selecting a vendor, participants were asked to recall prices for one of the vendors • Prices were reported graphically and numerically (e.g. mean, maximum, etc.) • Variance was rated from 1 (low) to 7 (high) Dolansky, Vandenbosch & Murray

12. Study Two Recall Results Zero-Slope Ascending Descending Actual Mean Response Actual Mean Response Actual Mean Response Mean (response) 8.10 7.82 4.86 6.05 11.14 9.85 Mean (graph) 8.10 8.02 4.86 6.18 11.14 10.47 Variance (response) N/A 6.09 N/A 4.56 N/A 3.76 Variance (graph) 7.57 6.96 7.57 6.99 7.57 7.41 Average Consecutive Difference (graph) 3.64 2.67 0.62 1.03 0.62 0.67 Slope (graph) 0.02 0.03 0.34 0.26 -0.34 -0.27 Ascending (response) 0 0.30 1 0.89 0 0.02 Descending (response) 0 0.11 0 0.09 1 0.93 Zero-Slope (response) 1 0.49 0 0.02 0 0.02 Dolansky, Vandenbosch & Murray

13. Choice Shares From Studies One and Two *p < 0.1; **p < 0.01; ***p < 0.001 (Binomial test of a difference from a 50% split) Dolansky, Vandenbosch & Murray

14. Study Two Findings • Participant responses/graphs were generally accurate, apart from perceived variance • Study one was replicated; the recall task does not affect choice or preference • Variance ratings differed across sequences Participants could accurately recall the sequences, yet still made sub-optimal choices Dolansky, Vandenbosch & Murray

15. Study Three Design What if the ending price drives the effect? • Replication of study one, with a different zero-slope sequence • Zero-slope sequence was inverted, so the new version ended on a low price • This was done to address concerns that recency was driving the choice shares Dolansky, Vandenbosch & Murray

16. Study One Price Sequences Dolansky, Vandenbosch & Murray

17. Study Three Price Sequences Dolansky, Vandenbosch & Murray

18. Choice Shares From Studies One and Three *p < 0.1; **p < 0.01; ***p < 0.001 (Binomial test of a difference from a 50% split) Dolansky, Vandenbosch & Murray

19. Study Three Findings • Successful replication of study one • The ascending sequence was significantly preferred in comparison to the descending sequence • Order effect disappeared • The ascending sequence was still dominant The ending price had no effect on choice or preference Dolansky, Vandenbosch & Murray

20. Study Four Design Is perceived variance truly driving the effect? • 2 (order) x 2 (equivalent peak vs. mean) x 2 (focal sequence) x 2 (prediction target) design • Participants chose between the a zero-slope sequence and an ascending sequence with the same mean/peak • Future price predictions were also elicited for either a focal sequence or the chosen sequence Dolansky, Vandenbosch & Murray

21. Scale Items for Study Four • Factor: Variability • The price sequence was variable • The prices I saw varied • I could not see any consistency in the pricing • Factor: Predictability • Past prices were helpful in predicting the next price • It was possible to predict the next price before it was shown • Each new price made sense given past prices Dolansky, Vandenbosch & Murray

22. Price Sequences for Study Four Dolansky, Vandenbosch & Murray

23. Study Four Findings • Order effect disappeared • No difference between equivalent peak (32.3%) and mean (36.7%) conditions was found *p < 0.1; **p < 0.01; ***p < 0.001 (Binomial test of a difference from a 50% split) Dolansky, Vandenbosch & Murray

24. Study Four Findings, cont’d • Higher prices were predicted for the ascending sequence ($11.99) than for the zero-slope sequence ($8.66) • Ascending predictions had the 3rd price higher than the 1st; zero-slope predictions did not • No effect of whether the predictions were for the sequence chosen (p = 0.776) The ascending sequence is chosen even with a higher mean, and predictions for it are higher yet Dolansky, Vandenbosch & Murray

25. Key Findings • Price sequences matter in choice • Perceived variability of a price sequence could be more important than the price itself • Perceived variance appears to be comprised of both predictability and variability • Even though participants expected a sequence to give prices that are 40% higher in the future, they still chose it • Uncertainty and ambiguity appear to play a large role in the decision-making Dolansky, Vandenbosch & Murray

26. Wrap-Up Thank you for your time! Any questions? Dolansky, Vandenbosch & Murray