Macro-economic determinants of consumer price knowledge: A meta-analysis of four decades of research

Abstract

For the past four decades, dozens of researchers have studied consumer price knowledge, often with disagreements on the extent of consumer' ignorance about prices. While some of these disagreements have been attributed to research design variations among studies, no inquiry has yet been made on the role of the economic environment on consumer price knowledge. Nevertheless, environmental factors such as interest rates, unemployment, and economic growth may significantly influence consumers' knowledge of prices. Certain economic environments may therefore provide marketers with the ability to utilize pricing tactics which rely on limitations in consumers' knowledge of product prices. Using a meta-analytic framework, this paper synthesizes the results of 297 previous price knowledge studies to document the effects of inflation, unemployment, GDP growth, interest rates, country of study, and passage of time on consumer price knowledge. The meta-analysis results demonstrate that economic factors have considerable influence on explaining variations in consumer price knowledge. Managerial and public policy implications of the findings in light of turbulent economic environments are discussed.

Introduction

A fundamental tenet of neoclassical economic thinking is a consumer who is fully knowledgeable about prices (Marshall, 1890). Ever since Gabor and Granger's (1961) pioneering study of the price memory of hundreds of British housewives, dozens of researchers have tested consumers' price memory through a variety of research methods, with a number of results challenging the fundamental tenet of price memory. Researchers have, for example, shown that consumer knowledge of prices may be affected by the format in which prices are presented (e.g., Schindler and Wiman, 1989), the promotional status of a product (e.g., Krishna et al., 1991), or the research design choices used in collecting price knowledge data Estelami and Lehmann, 2001, Monroe and Lee, 1999.

However, no inquiry to date has empirically established the role of basic economic trends on consumer price knowledge. The primary reason for lack of such an inquiry has been an inability to experimentally manipulate economic forces, as variations in the economic environment cannot be realistically simulated in laboratory settings with experimental subjects (e.g., Shamir, 1985). For example, unable to detect variations in consumer price knowledge among four price knowledge studies conducted in different economic environments, Gabor (1988) concluded that a persistence of the ability to recall prices is an inherit characteristic of the consumer (p. 244). Other researchers disagree. McGoldrick and Marks (1987), for example, state that the approaches, scope and methodologies differ greatly, making it difficult to compare the findings (p. 593). The net result has been the accumulation of a large body of inconclusive research findings, and general disagreement on the role of the economic environment on consumers' knowledge of prices.

This line of inquiry is especially timely in light of emerging turbulent economic environments in the industrial world, and a global economic slowdown, as evident in economic indicators such as interest rates, GDP growth, and unemployment rates across a great part of the world. Economic forces such as inflation, unemployment, and high interest rates represent risks to consumer welfare, and are often assumed to provide incentives for consumers to improve their knowledge of prices, thereby affecting marketers' ability to capitalize on consumer ignorance of price information (e.g., Monroe, 1990, Kotler and Roberto, 1989, Nagle and Holden, 1995). From a practical perspective, this research would therefore help identify economic environments which foster consumer ignorance of prices, providing both marketers and public policy makers with the improved ability to recognize environments which may allow sellers to capitalize on consumer's limited knowledge of prices. From an academic perspective, this line of inquiry would also shed light on the accuracy of consumer price knowledge measures obtained under various economic circumstances, thereby helping future researchers gauge the extent of variance in price knowledge resulting from the economic environment in which the studies are conducted.

The accumulation of price knowledge studies spanning a period of four decades provides a unique opportunity to examine the role of economic forces on consumer price knowledge. To facilitate such an inquiry and to combine the various study results, a meta-analytic approach is utilized in this paper. The authors integrate 297 price knowledge studies from over two dozen manuscripts spanning the 1961–1999 time period and covering over 50 product categories to examine the effects of macro-economic factors such as inflation, unemployment, and interest rates upon consumer price knowledge. The paper concludes with a discussion of managerial implications of the findings.