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Placebo effects of marketing actions. How prior experience modulates the effect of price on expectations about product efficacy

Final Report Summary - PLACEBO (Placebo effects of marketing actions. How prior experience modulates the effect of price on expectations about product efficacy.)

THE PROJECT’S MAIN RESULTS

To illustrate the questions that we have addressed in this research project, imagine a customer who buys a bottle of wine and consumes it. Two weeks later, she purchases the exact same bottle at a different price (i.e. a price promotion ended or was initiated). Would the quality of the wine change (qualityt1 ≠ qualityt2) because the price changed (pricet1 ≠ pricet2)? If so, would the quality of the wine depend on the initial price, the current price, or both? Would it matter if the wine was purchased at a reduced price or sampled for free? Would the quality of the wine depend on initial price or on experienced quality?

This scenario highlights the need for research aimed at understanding how the effect of price promotions on product quality unfolds over time. Prior research suggests that marketing actions trigger placebo effects and change the actual benefits consumers derive from products: Because consumers generally expect lower-priced products to be of lower quality, an otherwise identical product may actually perform worse when its price is lower. It is surprising that, despite a growing interest in the temporal dynamics of price promotions on brand equity and loyalty, no research has examined the lagged effects of price promotions on actual experienced product quality. Needless to say, actual experienced product quality is a key determinant of perceived product benefits and ultimately drives customer satisfaction and loyalty. Developing an accurate understanding of how price promotions affect product quality over time is therefore critical for the successful deployment of marketing tactics.

A series of experimental and longitudinal studies that we conducted as part of the research project demonstrate that price reductions trigger immediate and lagged negative effects on product quality, while free offers only cause lagged negative effects and no immediate negative effects. Importantly, the studies suggest that price promotions continue to exert a negative effect on product quality, even after direct product experience. The main conclusion is that the quality of a bottle of wine changes when the price changes, even when a consumer has experienced the wine before, and that price is a more important driver of product quality than experienced quality.

THE MAIN CONCLUSIONS & CONTRIBUTIONS

The experimental studies provide important theoretical contributions and managerial implications. First of all, our data suggest that price changes within a given time period affects experienced product quality. This shouldn’t be surprising, as placebo effects of marketing actions have been uncovered by many scholars. Nevertheless, our studies go beyond mere replication attempts. For instance, no research has examined how offering a product for free affects quality expectations, let alone subjective or objective product quality. Our data suggest that free trials do not erode product quality in the short-run. Furthermore, although prior research has examined whether brand versus price is a stronger predictor of perceived quality, no research has ever tested effects on actual product quality. The studies suggest that branding doesn’t protect against the negative effects of price promotions. I conclude that price changes within a given time period are powerful signals of product quality, since branding doesn’t protect against the negative effects of price promotions.
Second, the studies demonstrate that placebo effects are resilient phenomena and should be taken seriously, as they do not constitute short-lived or temporary effects. We observed that price reductions exert a negative influence on actual product quality up to at least 14 days after the promotional activity. These observations may contribute to our understanding of the long-term negative effects of price promotions on brand equity, brand sales, and profit, because a poor consumption experience undermines customer satisfaction and loyalty.
Third, the studies suggest that post-experience marketing may partially compensate the lagged negative effect of a price promotion. Indeed, over and above the enduring negative effects of price reductions on quality, current marketing actions continue to shape product quality. If consumers are confronted with a price increase, product quality increases commensurately, even when they experienced low product quality two weeks earlier. However, when consumers are confronted with a price decrease, product quality drops, even when consumers could rely on first-hand information about the high quality of a product. These effects illustrate that consumers do not necessarily rely on direct experience to form quality expectations. Information extracted from marketer controlled sources remains important, even after product experience.

THE POTENTIAL SOCIO-ECONOMIC IMPACT OF THE PROJECT

The European Union began investigating the pharmaceutical sector after complaints that non-branded, generic drugs were slow in coming to the market. According to the former European Union competition commissioner, Neelie Kroes, makers of original, branded medicines were actively trying to delay the entry of generic medicines on to the market. Next to the dealings between brand-name companies and generic drug makers, there might be another mechanism contributing to the low popularity of generic drugs. Because people tend to assume that low price means low quality, consumers may resist purchasing cheap generic drugs, because they believe are less effective than branded alternatives. This research project suggests that not only inexperienced consumers but also experts with extensive product experience and knowledge may fall prey to faulty beliefs about products, services, and technologies. Indeed, even pharmacists and doctors pay significant premiums for branded drugs than for their generic bio-equivalents. My experimental studies paint a gloomy picture of why these beliefs are so hard to eradicate: We hold these beliefs based on product experience, the most seductive evidence, but fail to realize that our experiences are tainted by past and present marketing actions.