Stephen Morris Blogs

Prevalence of Relative Thinking on the Internet

(University of San Francisco Research Colloquia) Permanent link   All Posts

*When: April 12, Thu, 11:45 AM - 12:45 PM
*Where: MH 230

Sweta Thota and Ricardo Villarreal

Title: Prevalence of Relative Thinking on the Internet
Abstract:
Consider the following scenarios: Situation 1: a consumer who is planning the purchase of a 55”3D LED TV priced at $1999 in a store meets a friend in the store who tells her that the same TV is available for a $20 discount at another store located 20 minutes away; Situation 2: a consumer who is planning to purchase a 26” LCD TV for $150 in a store is informed by a friend that the same TV is available for a discounted price of $130 at another located 20 minutes away. Is the consumer in Situation 1 as likely to travel to the other store away as the consumer in Situation 2?

Most consumers might choose to take the additional 20 minute travel effort to save $20 only on the TV priced at $150. The model of rational choice in traditional economic theories advocates that the price difference which guides the extra travel and effort should be the same regardless of the original price of the good because the additional cost of incurring an extra 20 minute travel is the same regardless of the good’s price (Azar 2007). However, consumers behave as though their search costs in terms of time and money increase proportionately to price of the purchase item. Consequently, consumers systematically violate this model and opt to exercise the additional effort only when the saving relative to the price of the original good is higher i.e., when the original price of the good is lower. This phenomenon is called relative thinking.

Past research has shown that relative thinking is instrumental in retailing and pricing areas. Further, given our limited cognitive abilities, individuals utilize several choice heuristics (ingrained into our decision-making system) which often provided reasonably accurate solutions with minimal amount of effort (Todd, 2000). Since it is widely acknowledged that human beings are cognitive misers (Fiske and Taylor 1991), it is not surprising that even with our contemporary and rational decision-making abilities, we still rely on heuristics which could often lead to biased decision outcomes. Relative thinking is a heuristic that leads to a decision bias because a saving of $20 should be equally valuable to a consumer regardless of whether the original price of an item is $50, $100 or $1000. Now consider the above two situations in the context of a consumer considering the purchase of the earlier mentioned 51” TV (priced at $1999) vs. the 26” TV (priced at $150) on the Internet. Is a consumer equally likely to browse other web sites for a twenty dollar saving ? That is, do individuals perceive the attractiveness of saving an ‘x’ amount on a low vs. high priced item similarly across the internet and brick and mortar stores? Specifically, does relative thinking phenomenon hold in the context of internet based search for lower prices?

This paper highlights boundary conditions and hypothesizes and investigates the relative thinking phenomenon in the context of Internet. Results show that the internet sets boundary conditions for the relative thinking phenomenon.

 


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