About AMA

Christopher K. Hsee, Jean-Pierre Dubé, and Yan Zhang

Executive Summary
In recent years, China has become one of the world’s most formidable consumer markets. The impact of this consumer boom has been particularly apparent in the Chinese real estate market, one of the most active real estate markets in the world. Real estate developers are increasingly relying on careful pricing practices to avoid missing profitable opportunities in this fast-paced, but otherwise relatively young housing market.

In this article, the authors begin with an interview study (Study 1) that involves real-estate professionals who set prices for developers in Shanghai. The study indicates that most of them want the undesirable units in a building (e.g., units on lower floors) to sell as fast as or faster than the more desirable units (e.g., units in middle floors) in the same building, and they set the prices of the undesirable units lower than the prices of the more desirable units to obtain their intended sales pattern.

Despite the price setters’ intentions and efforts, a field study involving three data sets from Shanghai (Study 2) reveals the opposite sales pattern. Undesirable units sold at a slower pace than desirable units. Oftentimes, units on low floors still remained on the market, while others units were gone.

The authors explain this intriguing discrepancy between the desired and the actual sales patterns using Tversky, Sattath, and Slovic’s prominence principle. According to this principle, different response modes (choice versus matching) lead to different weighting of different attributes. When faced with options involving multiple attributes, people in the matching mode tend to assign less weight to the most important (prominent) attribute than people in the choice mode. In the context of real estate markets, developers are in a matching mode when setting prices (“If apartments on the first floor are 5000 yuans/square meter, how much should apartments on the second, third floor, fourth, and so on, floors be?”), whereas consumers are in a choice mode when deciding which units to purchase (“Shall I buy a cheaper apartment on the second floor or a more expensive apartment on the eighth floor?”).  Survey data also suggest that buyers consider floor more important than price. According to the prominence principle, developers underweight the importance of floors relative to buyers. This explains why good floors sell faster than bad floors.

To rule out confounding variables and further test our explanation, the authors conduct two controlled experiments (Study 3 and Study 4). The results of these experiments were remarkably parallel to the results of the field study, reinforcing the belief that the prominence principle is the underlying reason.

To the best of their knowledge, the authors are the first to make a connection between the prominence effect and real outcomes in the marketplace. Their findings may have implications beyond the Shanghai real estate market and for other product categories for which buyers consider quality more important than price and sellers use a matching procedure to set prices.

Biography
Christopher K. Hsee was born and raised in China, received his PhD from Yale in 1993, and is now Theodore O. Yntema Professor of Behavioral Sciences and Marketing at the University of Chicago Graduate School of Business. His research interests range from judgment and choice, to consumer and managerial behavior, to emotion and happiness. For more information, visit http://faculty.chicagogsb.edu/christopher.hsee/vita/index.htm.

Jean-Pierre Dubé is Professor of Marketing and Neubauer Faculty Fellow in the Graduate School of Business at the University of Chicago, where he has been a faculty member since 2000. His research applies economic models of empirical industrial organization to study marketing problems. His current areas of research include the competitive dynamics associated with pricing and advertising, the impact of consumer switching costs on pricing, price discrimination, industrial market structure for branded goods, and Internet marketing. He is on the editorial board of Marketing Science, Product and Operations Management, and Recherche et Application en Marketing. He has also served as a reviewer for several journals in marketing and economics. He has published several articles in Journal of Marketing Research, Management Science, Marketing Science, Marketing Letters, and Quantitative Marketing and Economics.

Yan Zhang is a doctoral candidate in the Graduate School of Business at the University of Chicago. Her research focuses on mental processing styles in consumer choices, pricing scheme and consumer satisfaction, and egocentric biases in social judgments. She is also interested in applying behavioral theories to understand field data—for example, to explain price differences in auctions with the anchoring and adjustment heuristic.