On the Non-Equivalence of Trade-ins and Upgrades in the Presence of Framing Effect: Experimental Evidence and Implications for Theory

37 Pages Posted: 22 Oct 2018 Last revised: 10 Jun 2019

See all articles by Mahdi Mahmoudzadeh

Mahdi Mahmoudzadeh

Georgia Institute of Technology, Scheller College of Business

Date Written: May 1, 2019

Abstract

Manufacturers of durable goods often buy back older versions of their products from customers to encourage them to switch to improved versions and to create control over product return streams in their closed-loop systems. Classical models and conventional wisdom have long ignored that the framing of these buyback schemes, whether through trade-ins or through upgrades, can matter for theory. Using the reference-point shift mechanism, we provide experimental evidence that the alternative frames are not equivalent, and that the framing effect induces customers to change which prices they anchor to as their reference points for the price for their current version. We then use the experimental findings to extend a reference-dependence version of the classical model of trade-ins and upgrades, keeping our extension in line with the basics of PEEMs (Portable Extensions of Existing Models), and show how the reference-dependence model modifies key predictions of the classical model and provides predictions more in line with today's durable-goods markets.

Keywords: trade-in, upgrade, framing effect, reference dependence, durable goods

JEL Classification: M1

Suggested Citation

Mahmoudzadeh, Mahdi, On the Non-Equivalence of Trade-ins and Upgrades in the Presence of Framing Effect: Experimental Evidence and Implications for Theory (May 1, 2019). Georgia Tech Scheller College of Business Research Paper No. 17-42. Available at SSRN: https://ssrn.com/abstract=3066798 or http://dx.doi.org/10.2139/ssrn.3066798

Mahdi Mahmoudzadeh (Contact Author)

Georgia Institute of Technology, Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

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