Relative thinking in consumer choice between differentiated goods and services and its implications for business strategy

Abstract

The article shows that when people consider differentiated goods or services that differ in price and quality, they exhibit a decision-making bias of ``relative thinking'': relative price differences affect them even when economic theory suggests that only absolute price differences matter. This result is obtained in four different consumption categories. Sometimes subjects are affected only by relative price differences (``full relative thinking'') and sometimes also by absolute price differences (``partial relative thinking''). This behavior has implications for various disciplines, and it is particularly relevant in models dealing with horizontal or vertical differentiation, optimal pricing, competitive strategy, or advertising.

Keywords

• relative thinking; consumer behavior; product differentiation;judgment and decision making.