About AMA

Executive Summary
The effectiveness of marketing practices such as value pricing, product design, negotiations, and bundling is dependent on knowing the consumer's reservation price (i.e., the maximum price the consumer is willing to pay for a unit of the product or service). Despite the importance of the reservation price construct, there is a lack of consensus in the literature on the "right" way of measuring, and perhaps even defining, the construct.

Traditionally, the reservation price has been conceptualized as a point measure, a sort of value threshold for a given consumer and for a particular product. A central inconsistency across extant definitions is in the (implied) purchase probability of a consumer when the price equals his or her reservation threshold. Indeed, purchase probabilities from 100% to 0% have been linked to the threshold. The definitions converge only if the consumer's propensity to buy transitions from a definite yes to a definite no at a single price point rather than over a range of values. Such a conceptualization would be apt only if consumers are absolutely certain of the performance/quality level of the product and their own preferences for it. However, the evidence in the literature suggests that consumers are seldom certain on either score. Therefore, the authors propose that it is more reasonable to conceptualize a consumer's reservation price as a range, with the supports within the range mapping on to various levels of purchase probability. They identify the floor, indifference, and ceiling reservation prices as three salient supports, tied to 100%, 50%, and 0% purchase probabilities, respectively. The extent of a person's reservation price range is posited to be positively related to his or her level of performance- and preference-related uncertainty.

The primary contribution of the study is methodological. The authors propose an approach called ICERANGE, which is short for incentive compatible elicitation of the range in a consumer's reservation prices. The approach, which tied to actual choice and motivated by Becker, DeGroot, and Marschak's (1964) point-of-purchase methodology, is the first in the literature to measure people's reservation prices as a range. The range measurement acquires significance in light of theoretical and empirical evidence that the point representation of reservation price is tenuous. The range characterization retains the point measure as a special case. ICERANGE tackles two common sources of bias in reservation price elicitation—namely, strategic bias (caused by second guessing) and incentive incompatibility (due to lack of reward for telling the truth and the absence of penalty for lying). The approach itself involves an elicitation phase, in which consumers provide binding responses to a series of questions on reservation prices, and an enforcement phase, in which they are required to purchase (or forgo) the item on the basis of their responses.

The authors demonstrate the superior predictive performance of ICERANGE relative to multiple benchmarks in two studies in which participants (college students) had the opportunity to buy the product (Belgian chocolate in one study and Australian wine in the other). The two studies confirm the existence of the reservation price range. Furthermore, data from the more elaborate chocolate study support the premise that people's reservation price ranges are positively related to their respective levels of performance- and preference-related uncertainty.

From a managerial perspective, ICERANGE holds promise as a practical methodology for reservation price measurement. The empirical study is encouraging in this regard, in terms of both its performance and its feasibility. Respondents stated that they were comfortable with the method and did not appear to find the additional questions difficult to understand or onerous.

Biography
Tuo Wang is an Assistant Professor of Marketing at Kent State University. He joined Kent in 2004 after receiving a PhD in Marketing from the Katz Graduate School of Business at the University of Pittsburgh. He has an MS in Resource Economics from the University of Maine and a BA in International Business from Sichuan University. Tuo's research interests include pricing, marketing channels, statistics, and e-business. His articles have appeared or are forthcoming in journals such as Journal of Marketing Research, Statistical Research, and Journal of Testing and Evaluation. At Kent State, Tuo teaches Marketing Research and Marketing Strategy to undergraduate students.

R. Venkatesh is an Associate Professor of Business Administration at the University of Pittsburgh's Katz Business School. He has a PhD in Marketing from the University of Texas at Austin, an MBA from the Indian Institute of Management, Ahmedabad, and a bachelor's degree in Mechanical Engineering from the University of Madras. Before obtaining his PhD, Venkatesh worked as a marketing and sales executive with Robert Bosch GmbH in India. His research is in the areas of pricing, product bundling, cobranding, e-commerce, and sales force management. His articles have appeared in Journal of Business, Journal of Marketing, Journal of Marketing Research, Management Science, and Marketing Science. He also writes periodically on related issues in Tech.Biz, the technology supplement to the Pittsburgh Business Times.

Rabikar Chatterjee is Professor of Business Administration at the University of Pittsburgh. He previously served on the marketing faculties of Purdue University and the University of Michigan and has been a visiting professor at the Australian Graduate School of Management, Sydney. Dr. Chatterjee received his PhD in Marketing from the Wharton School of the University of Pennsylvania in 1986. He has a bachelor's degree in Chemical Engineering from the Indian Institute of Technology, Kanpur, and the equivalent of an MBA from the Indian Institute of Management, Ahmedabad. He also has several years of industry experience in engineering, project management, sales management, marketing, and strategic planning positions. Dr. Chatterjee's teaching, research and consulting interests are in the areas of customer-focused marketing and product/service strategies, particularly in high-tech and/or engineered products and services. His research has focused on models of market response to new products, with applications in forecasting, product design, and pricing, and in methods for measuring and representing customers' perceptions of and preferences for competing products. Dr. Chatterjee's articles have appeared in various academic journals, including Journal of Marketing Research and Management Science. He is an associate editor in the marketing department of Management Science and a member of the editorial board of Marketing Science.