Can Consumers Learn Price Dispersion? Evidence for Dispersion Spillover across Categories
Journal Article
Should I search for a cheaper flight? How much should I bid for the house? To answer those questions, consumers form beliefs about the dispersion of flight prices or house bids… but how accurate are those beliefs? We provide evidence for a phenomenon we call dispersion spillover: Seeing more (vs. less) dispersed prices in one category leads people to perceive more price dispersion in another category. This dispersion spillover influences consumers’ judgments of price attractiveness and changes their likelihood to search for (and find) better options.
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.