All External Reference Prices Are Not the Same: How Magnitude, Source, and Fairness Shape Payment for Digital Goods

External reference prices (ERPs) are recognized to influence consumers' payment for physical goods. We examine the role of ERPs in a digital goods context, emphasizing the importance of disentangling the effects of two components of ERPs: the magnitude and the source. We first examine the impact of the price magnitude and then investigate how the impact of ERP magnitude is moderated by its source-the specific context in which the reference price is set-and by its perceived fairness. Using a laboratory experiment with 471 participants, we first establish that as an ERP increases, payment for digital songs also increases. Furthermore, the source of the ERP motivates payment differently. Indeed, consumers' willingness to pay is more strongly influenced by a price recommended by the site than by information on the price paid by others. Last, we show that the perceived fairness of the ERP matters. Results indicate that when the ERP is perceived to be high, the marginal effect of an increase in ERP on payment is smaller than when it is perceived to be fair. We contribute to the understanding of the effect of ERPs in digital context, where the source of an ERP can be varied, and perception of fairness can be heterogenous across consumers. This has implications for the design of digital platforms seeking to sell digital goods using a flexible pricing scheme.

Automated summary

External reference prices (ERPs) are recognized as influencing consumers' payment for physical goods. This study focuses on the role of ERPs in a digital goods context and examines the effects of ERP magnitude and source. Using a laboratory experiment with 471 participants, the study finds that an increase in ERP results in higher payment for digital songs. The source of the ERP, such as a recommended price by the site, and the perceived fairness of the ERP also influence consumers' willingness to pay.