Mode matters: an exemplar‐prototype hybrid (EPH) model of reference price formation

Purpose – This research aims to integrate two theories of reference price formation and to test the resulting exemplar‐prototype hybrid (EPH) model's predictions. Study 1 tests the predictions of the EPH model regarding price attractiveness ratings. Study 2 helps to document the process by which the EPH model operates. Design/methodology/approach – The investigation consists of a pair of laboratory experiments that manipulate the skew (positive, negative) of historic price data, and the frequency of the modal price (high, low) in the price history. Findings – Both the skew of prices to which consumers are exposed and the frequency with which the modal price occurs affect recall of the modal price and evaluations of the attractiveness of subsequent prices. Research limitations/implications – Consumers rely on information about both the price range and individual price points to form reference prices. Common models of reference price effects may be improved by including a non‐linear estimate of the effect of modal price frequency. Practical implications – Managers are advised to offer a consistent regular price from which occasional discounts of varying value are offered to create a strong memory trace in consumers' minds for the higher “regular” price and avoid such a trace for any one discounted price. Originality/value – Prior studies detail aspects of the relationship between reference prices and the attractiveness of market prices. This is the first attempt to integrate, rather than contrast, the two predominant types of theories (range‐based, price‐point based) of reference price formation.