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

Mazar, Nina, Botond Koszegi, and Dan Ariely (2013): True Context-Dependent Preferences? The Causes of Market-Dependent Valuations, Journal of Behavioral Decision Making, Forthcoming

39 Pages Posted: 27 Aug 2010 Last revised: 15 Sep 2013

See all articles by Nina Mazar

Nina Mazar

Boston University - Questrom School of Business

Botond Koszegi

Central European University (CEU) - Department of Economics

Dan Ariely

Duke University - Fuqua School of Business

Date Written: February 11, 2010

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

Suggested Citation

Mazar, Nina and Koszegi, Botond and Ariely, Dan, True Context-Dependent Preferences? The Causes of Market-Dependent Valuations (February 11, 2010). Mazar, Nina, Botond Koszegi, and Dan Ariely (2013): True Context-Dependent Preferences? The Causes of Market-Dependent Valuations, Journal of Behavioral Decision Making, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1665017 or http://dx.doi.org/10.2139/ssrn.1665017

Nina Mazar (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Botond Koszegi

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

Dan Ariely

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
(919) 381-4366 (Phone)

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