Tradeoffs Between Price and Quality: How a Value Index Affects

Many purchase decisions can be conceptualized as an optimization problem in which the customer's objective is to get the best for one's money, or what economists regard as "maximizing utility." But what does "get the best for your money" mean? If all the options in a choice set are perceived to have the same level of benefits, then the answer is simply to select the lowest priced alternative. However, few purchase decisions are this simple; most choice options differ in terms of both price and perceived benefits. In response to such a situation, the customer may simply choose the option which offers the highest level of perceived benefits. However, one may choose the option which offers the highest benefit-to-cost ratio, a commonly used definition of product value (Hauser and Shugan 1983). A third option, based on the multiattribute choice literature, is to tradeoff benefits and costs according to a weighted utility scheme in which benefits are generally assigned a positive utility and costs a negative utility. As consumers become increasingly price conscious, demand for products that offer the highest benefit-to-cost ratio is likely to increase. However, it is not always easy for consumers to determine which option is the "best buy"; consumers are limited in their capacity to process information. Consequently, the ease with which the available information can be used, or processed, has been shown to impact the decision-making process (Bettman, Johnson, and Payne 1991). For example, if consumers want to select the option which offers the greatest value, they may either make a less than optimal choice or choose to maximize an easier objective function. Furthermore, recent research suggests that many consumers do not have well-articulated preferences; consequently their choices and preferences are often influenced by the information available in the environment (Bettman and Sujan 1987; Biehal and Chakravarti 1982; Johnson, Payne, and Bettman 1988). Different information formats seem to facilitate the use of different strategies and heuristics, which in turn may lead to differences in expressed preference and choice (Bettman, Johnson, and Payne 1990; Russo, Krieser, and Miyashita 1975; Tversky, Sattah, and Slovic 1988). That preferences are often constructed during the choice process, rather than simply retrieved from memory, suggests that the information available at the time of choice has a significant impact on the decision outcome. Consequently, public policy makers need to understand how the processability of information affects consumer preference. However, while research has provided valuable insight into the information processing capabilities of consumers, much remains unknown about mental processes associated with the formation of preference. Therefore, choice behavior is not fully understood (Tversky, Sattah, and Slovic 1988). How do changes in the format used to present price and quality information, clearly established determinants of product choice (Jacoby, Olson, and Haddock 1973 Zeithaml 1982, 1988), affect consumers' preferences and choices? Furthermore, how are preferences and choices altered when consumers are prompted to consider the value of products, a widely used promotional technique? The objective of the present research is to explore these issues, thereby providing public policy makers with new insights into factors influencing consumers' perceptions of the importance of product price, quality, and value. This research is important for several reasons. First, an improved understanding of how information format influences the formation of preferences and consequently, the choice process, is theoretically important. Second, conditions under which consumers are more likely to choose the brand with the highest value (i.e., the brand with the highest quality per dollar paid) rather than the brand with the highest quality (and vice versa) will be easier to predict. Third, the notion of value is examined from the perspective of its impact on the information processing aspects of preference formation and choice. …