(The) effects of reference quality on consumer purchase decisions

Abstract

In standard economy, Customers are considered to be rational. However irrational consumption has been frequently demonstrated in a good deal of studies. Prospect theory, introduced by Kahneman and Tversky in 1979, found that a reference point has an effect on evaluation of outcomes and then on purchase decisions. This paper investigates the existence of the reference effect for quality, and loss aversion that is asymmetric response to reference quality by extending the scope of prospect theory. We propose models for reference price and reference quality based on BLP model, using actual data in MP3 players market. In results, we demonstrate the effect of reference quality on customer purchase decisions. Moreover customers are more sensitive to quality loss than price loss when purchasing MP3 players. These empirical findings help extend the scope with only price perception to quality in entertainment devices, and suggest the concept of multi-reference in digital goods and cultural goods. In addition, we confirm understanding the reference quality gives firms the opportunities to lead to a variety of customer purchase behaviors. Finally we discuss managerial implications such as promotion strategy and product innovation.