True Context-Dependent Preferences? The Causes of Market-Dependent Valuations

Abstract

A central assumption of neoclassical economics is that reservation prices for familiar products express people’s true preferences for these products, that is, they represent the total benefit that a good confers to the consumers, and are thus, independent of actual prices in the market. Nevertheless, a vast amount of research has shown that valuations can be sensitive to other salient prices; particularly when individuals are explicitly anchored on them. In this paper, the authors extend previous research on single-price anchoring and study the sensitivity of valuations to the distribution of prices found for the product in the market. In addition, they examine its possible causes. They find that market-dependent valuations cannot be fully explained by rational inferences consumers draw about a product’s value, and are unlikely to be fully explained by true market-dependent preferences. Rather, the market dependence of valuations likely reflects consumers’ focus on something other than the total benefit that the product confers to them. Furthermore, this paper shows that market-dependent valuations persist when – as in many real-life settings – individuals make repeated purchase decisions over time and infer the distribution of the product’s prices from their market experience. Finally, the authors consider the implications of their findings for marketers and consumers.

Former working paper title: "Price-Sensitive Preferences"

Keywords: stable preferences, context-dependent preferences, biases, demand, supply, welfare analysis, consumer surplus

JEL Classification: D12, D10, D4, D5, D6