A Behavioral Approach to Pricing in Commodity Markets: Dual Processing of Prices within and around Willingness-to-Pay Ranges

Many behavioral heuristics are fast and frugal ways for buyers to cope with uncertainty. Therefore, the extent to which pricing can rely on heuristic consumer reactions depends on the specifics and the extent of uncertainties in the market. In markets with a high degree of commoditization, uncertainties about the product are by definition low. However, as buyers are also uncertain about their own preferences, behavioral approaches can explain consumer reactions to price, even in a context of commoditization. In this chapter, we propose and test a dual process framework for pricing around buyers’ reservation prices. Such a dual process includes both rational and heuristic modes of choice. According to our framework, reactions to prices are more or less influenced by heuristic choice, depending on their relation to a buyers’ reservation price. This framework can explain the interrelations between rational and heuristic modes of choice, willingness-to-pay ranges, and latitudes of price acceptance. We also base a set of pricing and combined price-and-communication strategies on this framework. One interesting implication is that these pricing strategies are specific to target groups among buyers: as preferences and reservation prices are heterogeneous even in commodity markets, there are different potential buyers with a more rational or more heuristic mode of choice, for every price imaginable.