Can Consumers Learn Price Dispersion? Evidence for Dispersion Spillover across Categories

Abstract

Price knowledge is a key antecedent of many consumer judgments and decisions. This paper examines consumers’ ability to form accurate beliefs about the minimum, the maximum, and the overall variability of prices for multiple product categories. Eight experiments provide evidence for a novel phenomenon we call dispersion spillover: Consumers tend to overestimate price dispersion in a category after encountering another category in which prices are more dispersed (versus equally or less dispersed). Our experiments show that this dispersion spillover is consequential: It influences the likelihood that consumers will search for (and find) better prices and offers, and how much consumers bid in auctions. Finally, we disentangle two cognitive processes that might underlie dispersion spillover. Our results suggest that judgments of dispersion are not only based on specific prices stored in memory, and that dispersion spillover does not simply reflect the inappropriate activation of prices from other categories. Instead, it appears that consumers also form “intuitive statistics” of dispersion: Summary representations that encode the dispersion of prices in the environment, but that are insufficiently category-specific.