Rui (Juliet) Zhu, Xinlei (Jack) Chen, and Srabana Dasgupta
Executive Summary
Consumers commonly engage in replacement purchases, in which they replace an existing product with a new product. In such situations, the existing or used product is often exchanged for or traded in toward a reduction in the price of the new good. A distinctive feature of such trade-in transactions is that a consumer typically needs to negotiate two prices, one for the new product and one for the existing product. This raises the question of whether the existence of the trade-in transaction creates any advantages or disadvantages for the consumer. For example, will the price the consumer receives for the new good differ depending on whether there is a trade-in? Are consumers better off trading in their used product toward the purchase of the new one from the same retailer, or should they keep the two transactions separate by dealing with different retailers? This article promises to shed light on these questions.
The authors theorize that when consumers engage in a trade-in, as a result of mental accounting principles, they are likely to perceive the trade-in value of the currently owned product as highly important and thus spend a considerable amount of resources on negotiating the trade-in price. Because people have limited resources at a given time, more resources allocated to the more important task will result in fewer resources available to respond to a less important task. This implies that a trade-in consumer will have few resources left to negotiate the purchase price of the new good and therefore should be more tolerant of a high purchase price. In contrast, people who are involved in a single transaction, such as the purchase of a new good, have only one task to focus on and simply look for the lowest price possible. Thus, compared with people who are simply buyers, trade-in consumers may perceive the new product transaction as less important and may therefore be willing to pay a higher price for the new product. Conversely, trade-in consumers and sellers (e.g., a consumer who only sells his or her used good) are likely to perceive the used product transaction as equally important. Therefore, their willingness-to-accept price for the used product should be equivalent.
The authors find support to the hypotheses through a series of lab experiments. Furthermore, they demonstrate that perceived importance toward the used car transaction is the underlying mechanism for the effects. Finally, to lend external validity to the lab results, the authors examine real-world field data from the automobile market and find that, on average, trade-in customers end up paying an amount of $452 more than customers who simply buy a new car from the dealer.
This research makes several important contributions. First, it contributes to the literature on trade-ins or replacement decisions by suggesting that the presence of a trade-in affects consumers’ purchase price for the new product. Second, this research adds to the literature on buyer–seller differences by investigating situations in which consumers act as both buyer and seller simultaneously. The authors find that trade-in consumers tend to care more about the trade-in value they receive than the price they pay for the new product, and consequently, they exhibit a higher willingness-to-pay price for the new product than those who are buyers alone. Third, this research offers important insights into consumer psychology in a trade-in context. Although there is substantial anecdotal evidence suggesting that consumers should never discuss the terms of their trade-in product before finalizing a purchase price for the new product, it remains unclear why. This research addresses this question and provides evidence for the underlying process. Finally, this research offers public policy implications by demonstrating that when consumers separate the trade-in and new product purchase transactions, they could avoid paying higher price for the new goods.
Biography
Rui (Juliet) Zhu is Assistant Professor of Marketing in the Sauder School of Business at the University of British Columbia. She received her PhD in Marketing from University of Minnesota and her BA in Economics from University of International Business and Economics in China. Her research interests include consumer information processing and psychology, self-regulation, music effects, design and structural effects of physical environment, and experiential processing. Her research has been published in Journal of Consumer Research, Journal of Marketing Research, and Journal of Consumer Psychology.
Xinlei (Jack) Chen is Assistant Professor of Marketing at the University of British Columbia. He received his PhD in Marketing in 2005 from University of Minnesota and his BE in 1994 from Tsinghua University. His research interests include distribution channels, structural modeling of consumer choice and firm strategies (pricing, advertising, and promotion), new empirical industry organization, and the entertainment industry (movie and video games).
Srabana Dasgupta is an assistant professor in the Marketing Division at the Sauder School of Business, University of British Columbia, Vancouver. She holds a master’s degree in Economics from the Delhi School of Economics and received a PhD in Marketing from the University of Southern California in 2004. Her research interests include durable goods, pricing strategy, and models of information asymmetry. Her research has been published in Journal of Marketing Research.
Journal of Marketing Research, Vol. XLV, No. 2, April 2008
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