Transaction Utility and Quality Choice

Review of Marketing Science (Forthcoming)

17 Pages Posted: 19 Apr 2015 Last revised: 24 Jan 2018

See all articles by S. Sajeesh

S. Sajeesh

University of Nebraska - Lincoln

Sangyoung Song

Ewha Womans University

Date Written: August 6, 2017

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

JEL Classification: D43, L13, L15

Suggested Citation

Sajeesh, S. and Song, Sangyoung, Transaction Utility and Quality Choice (August 6, 2017). Review of Marketing Science (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2595754 or http://dx.doi.org/10.2139/ssrn.2595754

S. Sajeesh (Contact Author)

University of Nebraska - Lincoln ( email )

United States

Sangyoung Song

Ewha Womans University ( email )

11-1 Daehyun-dong
Seodaemun-gu
Seoul 120-750, Seoul Seoul 120
Korea, Republic of (South Korea)

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