Reference Point Dependence under Dynamic Pricing

Joowon Klusowski and Joseph Simmons, Marketing, The Wharton School

Abstract: Alongside advances in technological innovation, dynamic pricing — which allows prices to change according to current market conditions — has played an increasingly important role in marketing. Businesses nowadays have the capacity to optimize their prices real time, and consumers also have the means to benefit from such practices. Reflecting this growing importance, a burgeoning body of scientific research has investigated many different features of dynamic pricing, yet relatively little research has focused on the following aspect: dynamic pricing inherently provides multiple reference points to which people can compare current prices and respond accordingly. While previous research suggests that perceptions of gains and losses relative to reference points have numerous downstream consequences — often more so than do absolute gains and losses — relatively little research has examined which of the possible reference points would be more likely to have such effects under dynamic pricing. Motivated by this problem, this project will investigate people’s reference point dependence under dynamic pricing via a series of online and laboratory experiments. Ultimately, this project aims to provide useful knowledge to innovate dynamic pricing for both businesses and consumers alike.