A gereral test of reference price theory in the presence of threshold effects

The theory of reference prices has great theoretica1 appeal and considerable managerial significance. This paper provides a test of reference price theory in a general setting allowing for threshold effects and asymmetric market response with respect to the threshold. The theory is rigorously evaluated on the basis of predictive tests using the methodology of switching regressions, and the empirical results show strong corroboration for it. The paper concludes witth a discussion of managerial implications of reference price theory for promotional and pricing strategy.