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Transaction Utility and Quality Choice

Sajeesh Sajeesh () and Song Sang-Young ()
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Sajeesh Sajeesh: Department of Marketing, College of Business, University of Nebraska-Lincoln, Lincoln, USA
Song Sang-Young: Department of Marketing, Ewha School of Business, Ewha Women’s University, Seoul, Korea

Review of Marketing Science, 2017, vol. 15, issue 1, 1-17

Abstract: This paper uses a game-theoretic model to examine the role of reference price for firms that vary in their quality positioning in competing for customers. Reference prices provide consumers with additional components of utility. Building on previous research on the impact of consumer decision making on firm strategies, we focus on how firms choose their positioning when consumer utility is driven not only by acquisition utility but also by the transaction utility associated with the purchase and how this, in turn, affects firms’ pricing decisions and profits. Considering a competition between two firms, this paper shows that the firm with higher product quality provides greater discounts to consumers. We also show that when firms are allowed to set a high ‘regular’ price, product differentiation is greater between the firms, and price competition is less intense. Furthermore, under some conditions, the profits of both firms can be higher than the benchmark case (when the effects of transaction utility are ignored).

Keywords: transaction utility; reference prices; product positioning (search for similar items in EconPapers)
Date: 2017
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