Price as a Stimulus to Think: The Case for Willful Overpricing

Abstract

Consumers confronted with a product that offers an unexpected benefit are often uncertain whether the benefit is relevant to them. They might choose (or not) to reduce this uncertainty by thinking more about the offered benefit's relevance to their life. This paper argues that such heightened involvement depends on the price posted by the firm as well as on such other factors as level of uncertainty, magnitude of the offered benefit, and effort of thinking. It is shown that a profit-maximizing firm that takes into account the effect of price as a stimulus to think should sometimes price 'above' or 'below,' but not 'at,' a consumer's initially revealed willingness to pay. These pricing strategies are respectively termed transgressive and regressive pricing. Conditions congruent with these strategies are identified and the impact of the strategies on entry decisions is analyzed. Entry opportunities are shown to be potentially profitable even when the differentiating firm faces a high cost handicap. Additionally, firms that view price as a stimulus to think should develop preferences about the consumer's cost of thinking. Conditions are explored under which it is in the firm's best interest (or not) to empower consumers through activities aimed at reducing the cost of thinking (e.g., education, product trials, projective advertising). Finally, analysis is extended to the converse case in which a firm, instead of offering an additional benefit, simplifies a product thereby generating consumer uncertainty about the relevance of the withdrawn benefit. Consideration is given to conditions under which such product simplification should be accompanied by either a light or deep discount. Analysis predicts that the prescribed discounts can ease market entry. Moreover, firms with a product simplification strategy will often seek to make thinking more costly to discourage consumers from thinking about the relevance of withdrawn benefits.

Keywords: product differentiation, marketing strategy, consumer behavior, pricing, cost of thinking, entry decision, consumer empowerment