QUALITY IMAGE AND THE ‘ RATIONAL INATTENTION HYPOTHESIS ’ : AN EMPIRICAL STUDY OF THE DRIVERS OF $ 9 AND 9 ¢ PRICE-ENDINGS AMONG INTERNET-BASED SELLERS

Prior research shows that 9¢, 99¢, $9 and $99 in retail prices occur far more than expected. We investigate the extent to which these “‘9’ price-endings” occur in Internet-based selling, and explore what drives the observed variations. In particular, we explore theories based on customer perceptions of store quality image and rational inattention to price-endings. To accomplish this, we specify and test a discrete choice model for price-endings using more than 1.9 million daily observations on multiple categories of products sold by hundreds of Internetbased retailers. Our results show that a firm’s online reputation, its average price in a product category, the relative price levels within a product category, and the total number of digits in the product’s price have significant effects on the chosen price-endings with respect to different product categories. The results support an image theory of store quality, and suggest other behavioral and operations theories to explore in future work. We obtain mixed support for the theory of rational inattention. We also explore the role of information technology (IT) in firm price-setting, and offer new insights for marketers who wish to optimize price-setting decisions in the competitive online environment of Internet retailing.

[1]  Robert J. Kauffman,et al.  Partnering for perfection: An economics perspective on B2B electronic market strategic alliances , 2005 .

[2]  W Baker,et al.  Price smarter on the Net. , 2001, Harvard business review.

[3]  Robert M. Schindler,et al.  Image Communicated by the Use of 99 Endings in Advertised Prices , 2001 .

[4]  Kaushik Basu,et al.  Why are so many goods priced to end in nine? And why this practice hurts the producers , 1997 .

[5]  Why 99 Cents , 2000 .

[6]  R. Schindler.  Symbolic Meanings of a Price Ending , 1991 .

[7]  J. Baird,et al.  Relative frequencies of numerical responses in ratio estimation1 , 1970 .

[8]  Robert J. Kauffman,et al.  Follow the leader? Strategic pricing in e-commerce , 2000, ICIS.

[9]  Mark J. Zbaracki,et al.  Pricing process as a capability: a resource-based perspective , 2003 .

[10]  Yannis Bakos,et al.  The emerging role of electronic marketplaces on the Internet , 1998, CACM.

[11]  J. Hoseason.  Pricing: Making Profitable Decisions , 2003 .

[12]  Robert J. Kauffman,et al.  The Move to Artist-Led Online Music Distribution: Explaining Structural Changes in the Digital Music Market , 2005, Proceedings of the 38th Annual Hawaii International Conference on System Sciences.

[13]  R. Heeler,et al.  PRICE ENDINGS IN ASIA , 2001 .

[14]  K. B. Monroe.  Pricing: Making Profitable Decisions , 1990 .

[15]  R. Schindler.  Relative Price Level of 99-Ending Prices: Image Versus Reality , 2001 .

[16]  Testing For Perceptual Underestimation of 9-Ending Prices , 1993 .

[17]  Michael Wooldridge,et al.  Econometric Analysis of Cross Section and Panel Data, 2nd Edition , 2001 .

[18]  Bradley J. Ruffle,et al.  99: Are Retailers Best Responding to Rational Consumers? Experimental Evidence , 2003 .

[19]  H. G. Parsa,et al.  Menu price endings that communicate value and quality , 2001 .

[20]  Ramayya Krishnan,et al.  Retail Strategies on the Web: Price and Non-Price Competition in the Online Book Industry , 2003 .

[21]  A. Rao,et al.  The Effect of Price, Brand Name, and Store Name on Buyers’ Perceptions of Product Quality: An Integrative Review , 1989 .

[22]  13. PSYCHOLOGICAL PRICING IN THE FOOD INDUSTRY , 1967 .

[23]  Alan Agresti,et al.  Categorical Data Analysis , 1991, International Encyclopedia of Statistical Science.

[24]  Mark Stiving,et al.  Price-Endings When Prices Signal Quality , 2000 .

[25]  Chrysanthos Dellarocas,et al.  The Digitization of Word-of-Mouth: Promise and Challenges of Online Feedback Mechanisms , 2003, Manag. Sci..

[26]  Robert M. Schindler,et al.  Patterns of Rightmost Digits Used in Advertised Prices: Implications for Nine-Ending Effects , 1997 .

[27]  Robert J. Kauffman,et al.  Should we expect less price rigidity in the digital economy? , 2004, 37th Annual Hawaii International Conference on System Sciences, 2004. Proceedings of the.

[28]  Christopher S. McIntosh,et al.  Qualitative Forecast Evaluation: A Comparison of Two Performance Measures , 1992 .

[29]  Eric T. Anderson,et al.  Mind your pricing cues. , 2003, Harvard business review.

[30]  Robert J. Kauffman,et al.  REVOLUTIONARY RESEARCH STRATEGIES FOR E-BUSINESS MANAGEMENT: A PHILOSOPHY OF SCIENCE PERSPECTIVE FOR RESEARCH DESIGN AND DATA COLLECTION IN THE AGE OF THE INTERNET , 2003 .

[31]  Joseph E. Stiglitz,et al.  THE CAUSES AND CONSEQUENCES OF THE DEPENDENCE OF QUALITY ON PRICE , 1987 .

[32]  C. Sims.  Implications of rational inattention , 2003 .

[33]  C. Folkertsma,et al.  Smooth Euro Changeover, Higher Prices? Results of a Survey Among Dutch Retailers , 2002 .

[34]  A. Kashyap,et al.  Sticky Prices: New Evidence from Retail Catalogs , 1994 .

[35]  Robert M. Schindler.  Consumer Recognition of Increases in Odd and Even Prices , 1984 .

[36]  R. Winer,et al.  An Empirical Analysis of Price Endings with Scanner Data , 1997 .

[37]  R. Schindler,et al.  Increased consumer sales response though use of 99-ending prices , 1996 .

[38]  Does the “9 Fixation” in Retail Pricing Really Promote Sales? , 1965 .