An Empirical Analysis of Internal and External Reference Prices Using Scanner Data

Abstract

Single-source yogurt data are used to examine whether both internal and external reference prices affect purchase decisions. Internal reference prices are memory-resident prices based on actual, fair, or other price concepts. External reference prices are observed stimuli, such as “regular prices,” that stores may display along with a sale price for comparability. Discrete choice models with variables representing the two types of reference prices are estimated, and both types of variables are found to have significant effects on purchase probabilities. This suggests that consumers may use multiple reference points in evaluating price in purchase decisions. In addition, a model using an indicator of a sale price discount explains purchase probabilities as well as one that models the actual discount, which suggests that consumers may be reacting to the indication of savings rather than to the amount of the discount.