Reference prices are invariably linked to consumers’ price
expectations. Consistent with the behavioral explanation given
above, there can be at least two distinct price expectations
that influence purchase decisions. On one hand, Thaler [3]
treats the expectation of the store price as an internal reference
point in the prospect theory framework [4]. Several empirical
papers have tested the predictions of this theory by examining
how consumers respond to psychological losses and gains [5].
On the other hand, in a rational utility maximizing framework,
the consumer’s price expectation is the expected cost of alternative
purchase options, i.e., price at a different store or same
store in a later week. Several marketing studies, using either
the analytical [6] or the empirical approach [7], are based on
this framework. As we will discuss later, the two frameworks
need not be mutually exclusive of each other—depending on
the amount of cognitive resources consumers are willing to
invest during the shopping process, they may switch from
using one type of expectation to another