The Framing Effect of Price Format

Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Existing evidence suggests that preferences are affected by whether a price is presented as one all-inclusive expense or partitioned into a series of charges. To explain this phenomenon, we propose a simple psychological mechanism whereby price format determines how many product attributes are actively processed at the time of valuation. Three studies support the hypothesis that price partitioning acts as an incentive to process multiple product dimensions. This process sometimes leads to the paradoxical overweighting of minor (but easy to evaluate) attributes that would be overlooked under an all-inclusive price format. The effect of price partitioning on demand can be detrimental or beneficial, consistent with existing conflicting findings in the literature and with variance in practice. Beyond its predictive and prescriptive implications, this theory contributes to the general notion that pricing might affect as much as capture perceived value. A common approach to evaluating consumer preferences is to assume that individuals have a utility function defined on multiple underlying product attributes or dimensions (Keeney and Raiffa 1993; Lancaster 1966). Price information then enters the consumer choice process indirectly through the budget constraint or, as is customary in conjoint analysis, directly as a separate observable attribute in the utility function (Green and Rao 1971; Srinivasan 1982; Winer 2005). Either way, the convention is that the role of price is to index the cost of making a purchase. Although this framework has been usefully applied to a variety of marketing problems, recent research on the psychological aspects of pricing suggests that the role of price might be more complex than anticipated by standard economic principles. In particular, a number of studies have shown that the way price information is presented, termed price framing, often significantly influences perceptions of value (e. The present research investigates the effects of framing prices alternatively as one all-inclusive expense or partitioned into a series of mandatory charges. We posit that price format determines the " depth " to which consumers analyze the various dimensions of an offer. Consumers presented with an all-inclusive price are expected to concentrate their evaluation on 1 This paper is based on the first author's dissertation and he would like to thank the other members …