EXPRESS: A Reference-Dependent-Preferences-Based Model of Extended Warranty Purchase Decisions

Durable goods often come bundled with limited-time and sometimes generous factory/base warranties. Yet a sizable number of durable goods customers purchase extended warranties that they rarely make claims against. This study offers a reference-dependent-preferences-based theoretical explanation of why consumers purchase extended warranties even if their purchased good is already covered by a base warranty. Consistent with our theory of reference-dependent preferences, we show that consumers treat base warranties as a reference point, thereby creating a qualitative difference in the valuation of an extended warranty on the purchased product. Specifically, our theory model predicts that the loss aversion motivation for consumers with base warranties results in these consumers valuing extended warranties more favorably than their peers purchasing identical products without a base warranty. The authors validate the predictions from the theory model using observational data from the automobile industry and show how the reference-dependent-preferences-based effect varies with vehicle quality and with macroeconomic conditions. The analyses reveal autobuyers' elevated loss-aversion motivations and higher price sensitivity during weaker macroeconomic conditions than during more robust macroeconomic conditions. Finally, the authors use the empirical model to identify opportunities for auto dealers to engage in targeted price promotions as a function of prevailing macroeconomic conditions. These findings have important implications for marketing managers, as they provide valuable guidance on when an extended warranty should be promoted, to whom and what extended warranty should be marketed.

When Falling Just Short is a Good Thing: The Effect of Past Performance on Improvement

Models of reference-dependent preferences show that an individual’s utility depends on the difference between the outcome and a “neutral” reference point. Our paper investigates how distance from reference points affects future performance. We find that round numbers and personal bests motivate runners and that missing the goal by a small amount improves future performance. For those who achieve their goal, future performance suffers slightly. In empirical analysis, we use an extensive panel of marathon data, which contains a past running history for every runner in our sample and allows us to estimate runners’ ability and experience.

Frustrated Customers: The Effect of Unexpected Emotional Cues on Yelp Reviews

This paper explores how emotional cues from unexpected sports outcomes impact consumers’ perception of their experience at local businesses. Using nearly 1 million Yelp reviews from the Phoenix area, I empirically test for the presence of loss aversion and reference-dependent preferences in reviewer behavior. Consistent with loss aversion, unexpected losses lead to worse reviews while there is no effect for unexpected wins. The impact of unexpected losses is concentrated in home games, with no effect for away games. The results also reflect reference-dependent preferences since wins and losses in games predicted to be close do not impact reviewer behavior. Consumer services that cater to National Basketball Association fans (e.g., sports bars) experience pronounced effects.