Reference Effects of Price and Promotion on Brand Choice Behavior

We investigate the reference effects of price and promotion on consumer choice behavior. Our model is based on the premise that consumers form expectations about the future marketing activity of a brand from their past exposure to such activity. The model reflects not only reference price, but also the consumer's promotional reference point for a brand. We further assume that consumers use these points of reference in evaluating a brand at each purchase opportunity and that consumer response is influenced by the disparity between their reference points and the actual price and promotional status of the brand. These assumptions enable us to calibrate a brand choice model and test for the presence of reference effects. We first discuss the reference effects of price and promotion on consumer response and present our proposed models of reference point formation and brand choice behavior. Then we report the results of our empirical tests. We conclude with some suggestions for future research.