More or Less: A Model and Empirical Evidence on Preferences for Under- and Overpayment in Trade-In Transactions

More or Less: A Model and Empirical Evidence on Preferences for Under- and Overpayment in Trade-In Transactions

Trade-in transactions typically involve an exchange of an old, used version for a new or newer version of the product. When consumers trade in their used model for a new model, the firm faces the choice of paying the consumer a relatively low price for the used model and charging a commensurately lo...

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Bibliographic Details
Published in:Journal of marketing research 2011-02, Vol.48 (1), p.157-171
Main Authors: KIM, JUNGKEUN, RAO, RAGHUNATH SINGH, KIM, KYEONGHEUI, RAO, AKSHAY R., RA, AKSHAY R.
Format: Article
Language:eng
Subjects:
Consumer behavior
Consumer preferences
Consumer prices
Consumer psychology
Consumer research
Consumers
Economic models
Loss aversion
Market prices
Marketing
Modeling
Overpayment
Preferences
Pricing policies
Studies
Used equipment
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Summary:Trade-in transactions typically involve an exchange of an old, used version for a new or newer version of the product. When consumers trade in their used model for a new model, the firm faces the choice of paying the consumer a relatively low price for the used model and charging a commensurately low price for the new model or paying a relatively high price for the used model and charging a commensurately high price for the new model. The extant literature suggests that consumers always prefer to be overpaid in trade-in transactions because they disproportionately value the gain associated with the revenues from the sale of the used version of the product. The authors draw from the prospect theory value function to develop a simple analytical model that identifies a condition under which this preference for overpayment is reversed. Their model predicts that even when faced with economically equivalent price formats, consumers prefer to be overpaid when the ratio of the price of their used product to the price of the new product is low, but when that ratio is high, the preference for overpayment is reversed. They observe support for the predictions that emerge from the model in laboratory experiments.
ISSN:0022-2437
1547-7193