signals dependent on the context in which such signals operate?
Market price dispersion is an important motivating factor
in the use of lowprice signals (Sivakumar andWeigand 1996)
and, we believe, represents an important context for evaluation
of such signals. In the present research, we demonstrate
that low price signals are likely to favorably affect important
consumer outcomes when consumer perceptions of price dispersion
is low, but not when consumers perceive high market
price dispersion. This finding led to the question: how can
truly low-priced retailers, who deserve to benefit from such
signals, overcome the detrimental effect of high market price
dispersion? We found that retailers may be able to restore a
low price signal’s effectiveness by stepping up the penalty
(refund) level associated with the signal.
These issues are examined in two experimental studies.
We first discuss the theoretical basis for conceptualizing low
price guarantees as market signals and outline the essential
characteristics of such guarantees. Then we report the results
of our two studies, discuss the theoretical and practical implications,
and offer suggestions for future research.
Conceptual background
Low price guarantees
As indicated by our example, a lowprice guarantee (henceforth
LPG) may be defined as a policy where a seller posts
an offer price and guarantees to match or beat any lower
price found in the market. In general, there are two ways in
which sellers communicate the refund policy. One way is for
the policy to include an explicit additional penalty paid to the
consumer for finding a lower price in addition to the price difference
as assurance that the offered price is truly the lowest
available, an additional 15% of the difference in our example.
Asecond method is for the seller to simply provide a refund of
the price difference without an additional explicit penalty. In
either case, with an “explicit” penalty or an “implied” penalty,
the seller incurs a cost for failing to provide the lowest market
price for the selected item. The cost may include the explicit
self-imposed penalty or the implied penalty of loss in reputation,
or both, due to the required honoring of the guarantee
on a continuous basis (Boulding and Kirmani 1993). Due to
the costs associated with the required honoring of the LPG,
consumers may reason that the seller would offer such a policy
only if it could offer the lowest market price in a large
number of situations. To do otherwise would be economically
unwise. Signaling theory, as discussed in the following
section, provides an appropriate theoretical explanation for
this phenomenon.
Signaling theory and low price signals