PINE GROSBEAK MANUSCRIPT REVIEW HISTORY MANUSCRIPT (ROUND 2) Abstract

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1 1 PINE GROSBEAK MANUSCRIPT REVIEW HISTORY MANUSCRIPT (ROUND 2) Abstract Previous research suggests that products that are offered for free as part of a sales promotion are devalued, as consumers make inferences of reduced costs. This perspective suggests that as the promotional price of a product increases from zero, consumers perceptions of value of the product should also increase. Departing from this prediction, we demonstrate that consumers willingness to pay for a product after the promotion is retracted is, in fact, lower when it was offered at a low discounted price than when it was offered for free. We argue that the price of a product on promotion makes people think about its value and use the price as a natural anchor for value estimation. However, when the product is offered for free (or zero price), consumers are less inclined to automatically consider the value of the product. As such, they are influenced by incidental anchors such as the price of the main product. We show that free offers may not devalue the product after all, and at a minimum, devalues the product less than if the product was offered at a discounted price.

2 2 Research suggests that offering a product for free with another purchase devalues the product (Kamins, Folkes, and Fedorikhin 2009; Raghubir 2004). Offers of free gifts along with a purchase are a fairly common form of promotion and can be viewed as part of a broader category of promotions where products are offered at deep discounted prices, including but not limited to $0 (free). Consider a retailer offering an exclusive and innovative toaster for $15 for customers who spend more than $200. Similarly, consider a price promotion by a jewellery store in which customers purchasing a specific necklace for $50 could buy a specific ring for only $19, or yet a store offering a product for their most loyal customers for a markedly low price. In these situations, consumers are offered products for low, but not free, promotional prices. This research investigates two related questions in price promotions. First, do free promotions necessarily devalue a product? Second, is a free offer just an extreme case of a low price offer? Aimed at providing short-term incentives to consumers, a wide variety of consumer price promotions including simple price reductions, coupons, rebates, bundled offers, and free offers are common in the marketplace (Neslin 2002). Given the ubiquity of consumer price promotions, it is not surprising that extensive research examines the impact of consumer price promotions (Blattberg and Neslin 1990; Neslin 2002). While numerous studies attest to the positive effect of consumer price promotions on short-term sales, many studies have documented the negative, unintended consequences of promotions as well (Blattberg and Neslin 1990; Neslin 2002; Raghubir, Inman, and Grande 2004). Some of the negative consequences of consumer price promotions include stockpiling (Chandon and Wansink 2002), lower price expectations (Davis, Inman, and McAlister 1992; Rajendran and Tellis 1994), and unfavorable brand and/or quality evaluations (Dodson, Tybout, and Sternthal 1978; Raghubir and Corfman 1999). Despite the large literature on consumer price promotions, only a few studies have examined the impact of free offer promotions on product value once the promotion is retracted (c.f., Kamins et al. 2009; Raghubir 2004). As the opening examples illustrate, free or low price offers often take the form of a conditional promotion which requires consumers to purchase a focal product or spend a specific amount to avail a supplementary product at a discounted price or for free. Although not restricted to conditional promotions, this is the context used in the relevant previous research. Examining conditional promotions where the supplementary product is offered for free, Raghubir s (2004) value discounting hypothesis suggests that the extent to which consumers infer that the cost of the free product is low, their willingness to pay for it as a stand-alone product is likely to be low once the promotion is retracted. The present research extends the previous literature in several ways. First, we review evidence for the devaluation of free offers and propose that free promotions do not necessarily lead to devaluation. A free product is not necessarily a cheap product. If a high-end car manufacturer offers a free GPS, one would expect that the quality of the GPS to also be high. Similarly, if a high-end jeweller gives away a free bottle of wine to their customers with a specific purchase, we would not expect it to be a cheap wine. In other words, the value of a supplementary free product is likely to be commensurate with the value of the focal product. Since Raghubir s (2004) studies did not include a control condition, it is difficult to assert that offering a product for free devalues the product after promotion. In fact, we argue that her results are consistent with our conceptualization that the willingness to pay for a product offered for free is affected by contextual aspects such as the price of the focal product. Second, we also examine conditional price promotions in which the supplementary product is offered at a discounted, non-zero price. At first blush, one may argue that the value

3 3 discounting hypothesis proposed by Raghubir (2004), or the impact of the price of the focal product, as proposed here, should hold for zero (free) and non-zero (discounted) offers, with zero being at the extreme of a continuum. As such, the price consumers would be willing to pay for a supplementary product when offered as a stand-alone product should be lower when it is offered for free in the promotion than when it is offered at a discounted price. However, we argue that a price promotion offering a product for free is qualitatively different than one offering it at a discounted price. Across a range of price promotion contexts, we demonstrate that the price consumers are willing to pay for a product after the promotion is retracted is lower when it was offered at a low discounted price than when it was offered for free. In other words, in terms of product valuation, a free promotion is more beneficial for a marketer than offering a product for a discounted price in both the short and the long term. Our fundamental premise is that consumers do not view zero price (or free offer) as an indicator of the real price or cost of the product to the marketer. Since temporary free offer promotions are common in the marketplace, we reason that it is unlikely that consumers even think of the value of the product, unless it is made salient. In contrast, the non-zero nature of a temporary discounted price is likely to be naturally used as a reference to evaluate the deal in terms of savings with respect to the regular price of the product. We propose that consumers mental process of estimating product value is best described by the well documented anchoring effect whereby the presence of an externally provided anchor biases subsequent numerical judgments (Tversky and Kahneman 1974). Importantly, the nature of the anchor differs depending on whether a product is promoted for free or a non-zero price. Consistent with the findings of Raghubir (2004), we predict that when estimating the value of free products, the price of the focal product serves as an incidental anchor. In contrast, when estimating the value of nonzero priced products, the price of the supplementary product serves as a natural anchor. Therefore, more than an abrupt change in value for a shift from low price to zero, we demonstrate a change in direction such that lowering a promoted price to zero, actually increases the value of the product. We show that offers with low prices and even offers with moderate prices can cause more devaluation than a free offer. In fact, we show that free offers may cause no devaluation at all. The rest of the article is organized as follows. First, we review the relevant literature on price promotions and free offers. We then report the results of four studies, which provide converging evidence for our hypotheses across different promotional contexts and price levels. Together, the evidence shows that free offers are a special type of promotion in that the value of the supplementary product is not affected by its price on promotion (free or $0). Rather, consumers are affected by incidental anchors, such as the price of the focal product. In contrast, the value of supplementary products promoted for a non-zero price are influenced by its price and are considerably less affected by incidental anchors such as the price of a different (i.e., focal) product. We conclude by discussing our findings and possible directions for future research. CONCEPTUAL BACKGROUND The importance of consumer price promotions is underscored by the extensive research devoted to studying the impact of such promotions. While a rich literature attests to the positive impact of promotions on short-term sales (Neslin 2002), a relatively large literature also highlights the negative consequences of price promotions (Simonson, Carmon, and O Curry

4 4 1994), particularly on subsequent purchase occasions when the promotion has been retracted (Wathieu, Muthukrishnan, and Bronnenberg 2004). Free Promotions In the context of conditional price promotions, Raghubir (2004) argues for a process where consumers infer that the focal product has a high margin to cover the cost of the free supplementary product, because it is a low cost product, or both. This inferential process leads to the value-discounting hypothesis which suggests that the lower the price of the supplementary product on promotion, the lower the price consumers would be willing to pay for it, as well as for the focal product, when the promotion is retracted (Raghubir 2004). Indeed, Raghubir (2004) reported that willingness to pay for the free supplementary product reduced when the focal product price was reduced. Kamins et al. (2009) reported that the price consumers were willing to pay for a stand-alone focal product was lower when a supplementary product was described as free relative to when there was no mention of free in a promotion. They propose that individuals use a numerical or an inferential system to judge value. When the task is easy, such as in the valuation of a single product, consumers use the inferential system, which is more deliberate. In contrast, when a task is difficult, such as stating willingness to pay for a bundle of two disparate products, consumers tend to simplify relying on the numerical system, which is less effortful than the inferential system. This leads to the pattern of a freebie reducing the WTP of each component, but not of the bundle. This research extends the previous literature by arguing that not every free offer causes devaluation. Free offers are a common occurrence in the marketplace. Naturally, although consumers know that the product has some value, we propose that when it is offered for free on promotion, consumers do not make an effort in trying to assess its monetary value unless explicitly asked to do so. We note that a free product is not necessarily a cheap, low quality product. Companies sometimes give away free gifts with the purchase of expensive items. In this case, the free product also tends to be of high quality and relatively expensive for its category. At an intuitive level, if an airline gives away a free bottle of wine for consumers who buy first class tickets, we would expect the price and quality of the wine to be commensurate with the price of a first class ticket. In this case, estimates of value of the wine would not be affected by the fact that it was offered for free (or $0), but rather by the price of the first class ticket. At a process level, we reason that the price of the first class ticket would serve as an incidental anchor affecting estimates of value of the bottle of wine. An anchoring and adjustment model has been found to be a good descriptor of a variety of judgment tasks including numerical estimation (Tversky and Kahneman 1974), purchase quantity decisions (Wansink, Kent, and Hoch 1998), prediction tasks (Davis, Hoch, and Ragsdale 1986), and valuation of foreign currencies (Raghubir and Srivastava 2002). There is also evidence that anchoring and adjustment occurs in real world settings (Wansink et al. 1998). In the case of a free offer promotion, the proposed process is rooted in the research documenting the impact of incidental anchors on numerical estimates. In reviewing the literature on anchoring effects, Adaval and Wyer (2011) identified two theoretical perspectives: anchoring and adjustment as originally conceptualized by Tversky and Kahneman (1974) and selective accessibility (Strack and Mussweiler 1997). While Tversky and Kahneman (1974) deemed the anchoring and adjustment process to occur with relatively little deliberation, Strack and Mussweiler (1997) proposed that an anchor acts as a semantic prime, making individuals think about features of the target consistent with the value of the anchor.

5 5 When consumers are exposed to a high (low) price anchor, the accessibility of high (low) prices in memory increases, leading to a greater probability that this price will be spontaneously used as an anchor (Adaval and Wyer 2011). This process can be thought as numeric priming and has been shown to have a significant impact even when the anchor and the target are unrelated (Nunes and Boatwright 2004; Wong and Kwong 2000). For example, Nunes and Boatwright (2004) reported that consumers were willing to pay an average of $9 for a CD after incidentally being exposed to a sign indicating that sweatshirts were being sold for $80. The average willingness to pay for the CD decreased to $7.29 when the sweatshirt sign indicated a price of $10. This reduction in willingness to pay for the CD after being exposed to an incidental anchor occurred even though none of the participants thought that they had used the price of the sweatshirt to estimate their willingness to pay for the CD. In another demonstration of numeric priming on estimates, Wong and Kwong (2000) asked participants in the high anchor condition whether the runway of the Hong Kong airport was longer or shorter than 7300 m, while those in the low anchor condition considered a value of 7.3 km. Even though the values were equivalent, Wong and Kwong reasoned that numeric priming should occur at more superficial level, detached from units of measurement. As a consequence, 7300 m would prime a higher magnitude than 7.3 km. Consistent with their prediction, when participants were subsequently asked to estimate the price of a new bus, those in the high anchor condition provided higher estimates than those in the lower anchor condition. This line of research shows that just the mere presence of a number is enough to produce anchoring effects. In the context of conditional promotions, Raghubir (2004) reported that the value of a supplementary product offered for free with the purchase of a focal product is influenced by the price of the focal product. Although interpreted as evidence that free offers devalue the supplementary product, Raghubir s findings are consistent with the anchoring process described above. In fact, given the lack of a control condition in her studies, it is difficult to assess whether a free offer indeed devalued the supplementary product. Building on the intuition that free products are not necessarily cheap, as well as research showing the influence of incidental anchors, we propose that a free promotion does not necessarily devalue the supplementary product. Additionally, we propose that the influence of an incidental anchor, such as the price of the focal product, is a better descriptor of the valuation process (of the supplementary product), than the inferential process underlying the value discounting hypothesis. Non-free Promotions Although research on conditional promotions has not examined differences between promotions with zero and non-zero prices for the supplementary product, there is reason to suspect that consumers reactions may be quite different in these two cases. Research across several domains suggests that the number zero is perceived and treated in a qualitatively different manner than non-zero numbers, often causing a discontinuity in the transition from small numbers to zero (Palmeira 2011; Shampanier, Mazar, and Ariely 2007). Kahneman and Tversky s (1979) prospect theory also captures the idea that zero probability is viewed quite differently from small probabilities through the weighting function. For example, while individuals may react similarly to a.1% and a.2% probability of having a car accident, their reaction to a 0% probability of this event would be substantially different. In the context of conditional promotions, we propose that free and non-free promotions will lead to the use of different anchors. We argue that temporary free offer promotions are common in the marketplace and as such consumers are unlikely to think of the value of the

6 6 product, unless explicitly asked to do so. In contrast, we propose that conditional promotions in which the supplementary product is offered at a discounted price naturally leads consumers to focus on the discounted price. At an intuitive level, we argue that if an airline gives away a bottle of wine for $1 with the purchase of a first class ticket, the $1 price would take consumers focus away from price of the ticket. Although consumers know that the $1 price does not represent the price of the bottle, this value will be used as a natural anchor and bring estimates down (Tversky and Kahneman 1974). At the process level, we argue that unlike a free promotion, the valuation of a non-free supplementary product is influenced by its discounted price, which serves as a natural anchor. As such, while in a free promotion, the focal product price influences estimates as an incidental anchor, in non-free promotions, the promotion price itself serves as a natural anchor in estimating willingness to pay. Since adjustments from the anchor tend to be insufficient (Tversky and Kahneman 1974), the change in the nature of the anchor leads to an interesting effect, whereby a low, but non-zero price, for a supplementary product devalues it more than a zero price. Summary of Predictions and Alternative Accounts We have proposed that the process of estimating the value of a supplementary product is better captured by an anchoring process, whereby the nature of the anchor changes depending on whether it is a free or non-free promotion. Our reasoning leads to several predictions. First, we expect the estimated value of a supplementary product to be the same when it is offered for free relative to when its price is not disclosed. In both cases, the focal price should be used as an incidental anchor. This tests pits our reasoning against the value-discounting hypothesis (Raghubir 2004). Second, we predict that products offered for free will be more valued than products offered for a low price, because the anchor in free promotion will be higher than that of the non-free promotion. Our second prediction implies that consumers will have a more positive reaction to free promotion than non-free ones. Since previous research has shown that free promotions induce more positive affect than low price promotions (Shampanier et al. 2007), it is important to understand how the current predictions differ from that from existing research. Shampanier et al. (2007) reasoned that free offers increased positive feelings. As a result, one could argue that free offers elicit a feeling of reciprocation toward the marketer, which would increase the value of free offers. However, there are important distinctions between our investigation and that of Shampanier et al. (2007). First, we examine judgments of value after the promotion and not choice during the promotion. In this sense, Shampanier et al. (2007) examined value of the promotion, while we examine value of the product. Naturally, the value of the promotion increases as the price decreases. Shampanier et al. (2007) reported that choice increases substantially as the price goes from non-zero to zero. We argue that value of the product decreases as its price decreases, but then increases as it transitions to zero. In other words, not only do we propose and show a discontinuity, but we also predict a reversal in the relationship between price of the supplementary product and perceptions of value. We note that our prediction is also inconsistent with the value-discounting hypothesis which suggests that the lower the price of the supplementary item, the lower the inferred cost and thus the lower the willingness to pay for it (Raghubir 2004). Overview of Studies

7 7 Studies 1a and 1b begin the investigation by demonstrating that consumers willingness to pay for a stand-alone supplementary product is higher when it is offered on promotion for free than at a low discounted price. Importantly, it also shows that willingness to pay in the control and free offer conditions do not differ. Study 2 attests to the robustness of the findings by showing that the results replicate even when the smallest possible price is used ($0.01) and regardless of whether the promotional price of the product is described as free or $0.00. Studies 3a and 3b demonstrate that consumers willingness to pay for the stand-alone supplementary product is more strongly influenced by the price of the focal product when the supplementary product is offered on promotion for free than at a low discounted price. Finally Study 4 provides further evidence that a non-free offer leads consumers to use the discounted price as a natural anchor. As a result, non-free offers are less influenced when participants are explicitly asked to consider other natural anchors (specific prices). Study 4 also extends our findings to higher promotion prices and rules out several alternative explanations, namely positive affect, feelings of reciprocation caused by a free promotion, and meaningfulness of the promoted price. STUDIES 1A AND 1B Studies 1a and 1b examine the effect of the promotional price of the supplementary product on consumers willingness to pay for it as a stand-alone product, once the promotion is retracted. Since Studies 1a and 1b use identical procedures, only Study 1a is described in detail. Method of Study 1a One hundred and twenty five Australian residents between the ages of 20 and 30, recruited through an online panel company, took part in a single factor design with four levels. They were directed to the survey website and were assigned at random to one of four conditions. All participants saw a print advertisement for a pizzeria featuring a large pizza and bread sticks. While the price of the focal product (large pizza) was held constant at $15, the price of the supplementary item (bread sticks) was varied at four levels. In the control condition, the ad read Buy a large meat lover s pizza for $15...and don t forget to check out our side of 6 bread sticks! In the other three conditions, bread sticks were offered for free, $0.50, and $2 with the purchase of the large pizza. All participants then responded to a series of questions, starting with some filler questions in order to reduce the salience of the main dependent measures. Participants were specifically informed that the ad was of a pizzeria in the United States. Participants were first asked to indicate whether they have heard of Papa John s and how attractive the pizza looked in the picture. They were then asked How much would you be willing to pay for 6 bread sticks (when they are not on promotion)? In order to examine quality inferences, participants were also asked What are your expectations regarding the quality of the bread sticks? (1 = Low quality; 7 = High quality). Finally, in the three promotion conditions, participants were asked to indicate the promotional price of the bread sticks they had just seen in the ad. They were given five options: Free, $0.50, $1, $2, and Don t Know. This measure served as an attention check to ensure that participants encoded the price of the bread sticks. Results of Study 1a Twelve participants were eliminated from the analysis based on two criteria. First, participants were eliminated if they did not provide a dollar value for the willingness to pay

8 8 measure. Second, participants were eliminated if they failed to recognize the correct value for the promotion (Oppenheimer, Meyvis, and Davidenko 2009). Final cell sizes ranged from 26 to 30 across the four conditions. Note that including participants who failed the attention check does not alter the results significantly. A one-way four-level ANOVA revealed a significant effect on participants willingness to pay for the bread sticks (F(1, 109) = 5.16, p <.01). Planned contrasts show participants were willing to pay a significantly higher price for the bread sticks in the free condition than in the $0.50 condition (M s = $5.06 and $2.76; F(1, 109) = 8.45, p <.01 ) and were directionally higher relative to the $2 condition (M s = $5.06 and $3.91; F(1, 109) = 1.85, NS). The willingness to pay in the $2 condition was significantly higher than in the $0.50 condition (M s = $3.91 and $2.76; F(1, 109) = 3.88,, p <.05). Analyses of the three promotion conditions indicate a significant upward linear trend for willingness to pay as the price of the bread sticks varied from $0.50 to $2 to free (F(1, 81) = 4.61, p <.01). It is noteworthy that there was no significant difference in the willingness to pay across the free and control conditions (M s = $5.06 and $5.69; F(1, 109) < 1, NS). The willingness to pay in the control condition was significantly higher relative to the $2 condition (M s = $5.69 and $3.91; F(1, 109) = 5.02, p <.05) as well as the $0.50 condition (M s = $5.69 and $2.76; F(1, 109) = 17.06, p <.001). Figure 1 displays the results visually. [Insert Figure 1 Here] One-way ANOVA s on the expected quality of the bread sticks revealed no significant difference across the four conditions (F(1,109) = 1.31, NS). The results suggest that the promotional price of the supplementary product affects willingness to pay for it as a stand-alone product, without affecting quality perceptions. Method and Results of Study 1b Study 1b was a replication of Study 1a in a different product category. One hundred and thirty five Australian residents were randomly assigned to one of four conditions: control, free, $.50, and $2.00. In the control condition, participants saw the picture of a jar of tomato sauce from Ciao Organics priced at $8.95 and a package of Garofalo spaghetti (500g) with no price. In the other three conditions, the text below the spaghetti picture read (Free/$.50/$2.00) with the purchase of a jar of Ciao Organics tomato sauce! As in Study 1a, we eliminated ten participants who did not provide a dollar value for willingness to pay and those that failed the attention check on the price of the spaghetti. Cell sizes ranged from 26 to 37 across the four conditions. Figure 2 shows that the pattern of results was similar to that obtained in Study 1a. A one-way ANOVA revealed a significant effect on willingness to pay (F(1, 121) = 5.72, p <.01). Consistent with Study 1a, willingness to pay in the free condition was significantly higher than in the $0.50 condition (M s = $2.95 and $1.83; F(1, 121) = 14.06, p <.001) and directionally higher than the $2.00 condition (M s = $2.95 and $2.53; F(1, 121) = 1.90, NS). The willingness to pay was significantly higher in the $2 condition than in the $0.50 condition (M s = $2.53 and $1.83; F(1, 121) = 5.90, p <.05). As in Study 1a, analysis of the three promotional conditions indicate a significant upward linear trend for willingness to pay as the price of the spaghetti varied from $0.50 to $2 to free (F(1, 81) = 6.63, p <.01). Again, there was no significant difference across the free and control conditions (M s = $2.95 and $2.94; F(1, 121) < 1, NS). As in Study 1a, a one-way ANOVA failed to reveal differences in expected quality of the spaghetti across the four conditions (F(1, 121) = 2.11, NS).

9 9 [Insert Figure 2 Here] Discussion of Studies 1a and 1b Using two different product categories, results from Studies 1a and 1b lend converging support to our hypotheses. First, in both studies there was no difference between the control and free conditions, casting doubt in the assertion that a free promotion automatically devalues a product. Second, we demonstrate that consumers willingness to pay for the supplementary product when offered as a stand-alone product is influenced by its price on promotion. Although a value-discounting hypothesis would predict that willingness to pay should be lower as the promotional price of the supplementary product decreases from $2 to $0.50 to free, our findings show that willingness to pay for the stand-alone supplementary product is higher when it is promoted for free relative to a low discounted price. Although the willingness to pay was not significantly lower in the $2 condition relative to the free condition, the results were directionally consistent. In addition, an analysis pooling the data across the two studies comparing free and $2 conditions revealed a marginally significant difference (F(1, 121) = 3.38, p <.07). Importantly, the upward linear trend in willingness to pay as the promoted price of the supplementary product varied from $0.50 to $2 to free is consistent with our conceptualization and was significant in both studies. The results suggest that there is perhaps a threshold price beyond which offering the supplementary product for a discounted price will not differ from a free offer in terms of the willingness to pay for it later. STUDY 2 Study 2 had two major objectives. First, although our conceptualization does not distinguish between free and the number zero (see Shampanier et al. 2007), a potential concern with our studies is that the word free may evoke a different reaction than the number zero. In addition, while the other promotional prices were represented by a numerical value, in the free condition, it was shown as a word. Study 2 tests the robustness of the effect by varying the manner in which the free offer is represented. Second, although results from the first studies suggest that zero is a special price that is not used as an anchor, one may argue that this phenomenon is not restricted to zero and is actually a function of the feasibility of the value. In other words, zero would not be used as an anchor because participants identify it as an implausible reference price. Nothing costs zero. In contrast although $.50 may be considered a low price for six bread sticks it may still not be a completely implausible price. As such, our results may be driven by the implausibility of zero price as an anchor and other implausible prices could also lead to the same effect. Study 2 examines the robustness of the effect by considering the lowest price above zero ($0.01). Method One hundred and eighty-six Australian participants, recruited through an online panel company were assigned at random to one of three conditions (promotion: free/$0.00/$0.01). Participants saw a picture of chocolate mousse dessert and read the following text: Consider the following promotion from a restaurant: Special offer of the week! Try our new house pizza for $12 and get a chocolate mousse for (FREE/$0.00/$0.01)! Participants then indicated their willingness to pay and expected price of the mousse (open ended) and indicated the expected quality using a 5-point scale (1 = Poor; 5 = Excellent). On a new screen, participants were

10 10 presented with a second product and promotion: Consider the following promotion from Ciao Organics: This week only! Buy a box of Penne Rigate for $5.49 and get a bottle of Classic Tomato Sauce for $0.01! Pictures of both products were shown below the message. Participants then answered the same questions about the tomato sauce (willingness to pay, expected price, and expected quality). Results and Discussion A repeated measures ANOVA on willingness to pay, with product category being the repeated variable, revealed main effects of promotion (F(2, 371) = 12.76, p <.001) and product (F(1, 371) = 4.73, p <.05), but no interaction (F(2, 371) =.84, NS), indicating that although willingness to pay for different products were different (M mousse = $4.18 vs. M sauce = $3.55), the impact of the type of promotion was the same for both products. An ANOVA on expected price revealed only a significant effect of promotion (F(2, 371) = 4.82, p <.01) whereas product and the interaction were not significant (F product (1, 371) = 2.23, NS; F interaction (2, 371) =.59, NS). The first goal of Study 2 was to examine whether consumers react differently to the format of the free offer (free vs. $0.00). As shown in Figure 3, the results indicate that format did not have a significant impact on willingness to pay for chocolate mousse (M free = $5.43 vs. M $0.00 = $4.77; t(123) =.82, NS) or expected price for chocolate mousse (M free = $5.10 vs. M $0.00 = $5.67; t(123) =.79, NS). Similarly, there was no significant effect on willingness to pay for tomato sauce (M free = $4.02 vs. M $0.00 = $3.67; t(123) =.51, NS) or on expected price (M free = $4.36 vs. M $0.00 = $4.67; t(123) =.46, NS). The results are thus robust to variations in how the free promotional offer is presented. The second goal of Study 2 was to test whether an implausible low price such as $0.01 will lead to the effects that we observed for zero price. Since the free and $0.00 conditions were not significantly different, the data are aggregated across the two conditions. Consistent with our earlier results, the data showed that even a low price of $0.01 lowered willingness to pay (M zero = $5.10 vs. M $0.01 = $2.63; t(185) = 4.59, p <.001) and expected price (M zero = $5.39 vs. M $0.01 = $3.73; t(185) = 2.67, p <.01) for the chocolate mousse compared to the zero price condition. A similar pattern emerged for tomato sauce for willingness to pay (M zero = $3.85 vs. M $0.01 = $2.36; t(185) = 3.45, p <.001) but not expected price (M zero = $4.52 vs. M $0.01 = $3.73; t(185) = 1.42, NS). Separate comparisons between the free and $0.01 conditions, as well as between the $0.00 and $0.01 conditions, show the same significant pattern. Finally, an ANOVA on quality expectations revealed only a main effect for product (F(1, 370) = 7.52), p <.01), but no effect for promotion (F(1, 370) =.82, NS) or interaction (F(1, 370) =.01, NS). Study 2 demonstrates that the results are not driven by the implausibility of the anchors. A promotional price of $0.01 for a chocolate mousse dessert or for a bottle of tomato sauce is just as implausible a price as $0.00 but their effects are significantly different. This result is consistent with research that suggests that although plausible and implausible anchors operate differently, both have a significant impact on estimates (Adaval and Wyer 2011; Mussweiler and Strack 2000, 2001). Our results suggest that when a product is promoted for a low price (plausible or implausible), this price is used as a natural anchor causing a devaluation of the product. This does not occur with free offers. When a product is offered for free, zero is not used as anchor to estimate its value. [Insert Figure 3 Here] STUDIES 3A AND 3B

11 11 Studies 3a and 3b were designed to more directly examine the proposed anchoring mechanism. Since Studies 3a and 3b use identical procedures, only Study 3a is described in detail. We have argued that while a low price will be used as an anchor to estimate value, the zero price of a free promotion will not. As such, when a supplementary product is offered for free, rather than anchoring on zero, we argue that consumers will be influenced by an incidental anchor, such as the price of the focal product, to estimate the value of the supplementary product. In contrast, the price of the focal product should be less influential when the supplementary product is offered for a low discounted price, as the latter will be used as a natural anchor. To test this hypothesis, we manipulate the price of the focal product (or required purchase) and the supplementary product. We predict that the impact of the price of the focal product (or required purchase) on the willingness to pay for the supplementary product will be greater when the supplementary product is offered for free than when it is offered for a low price. Method of Study 3a One hundred and fifty-one Australian residents, between the ages of 20 and 30, were recruited through an online panel company. Participants were directed to a specific website and were assigned at random to one of four conditions. Participants saw an ad for a price promotion from a local jewellery store that was offering a silver pendant for either free or $5 with a minimum purchase of either $99 or $299. After participants read the ad, they were asked to state how much they would be willing to pay for the pendant when it was not on promotion. In addition, they were asked to indicate the extent to which they agreed or disagreed with the following statements (1 = Strongly disagree; 5 = Strongly agree): It is a great promotion, This is an effective promotion, and The silver pendant is of high quality. Finally, participants were asked to indicate the price of the pendant they had just seen in the ad as an attention check. Results of Study 3a Eleven participants were eliminated for failing to provide a numerical value for willingness to pay or failing the attention check (although including these participants does not change the results significantly). The analyses reported below are based on the remaining 140 participants. A 2x2 ANOVA on willingness to pay revealed significant main effects for minimum purchase amount (F(1, 135) = 4.81, p <.05) and price of supplementary product (F(1, 135) = 12.33, p <.001). These main effects were qualified by a significant two-way interaction (F(1, 135) = 5.31, p <.05). Planned contrasts showed that the willingness to pay for the pendant did not significantly differ across the $299 and the $99 minimum purchase conditions when the pendant was offered on promotion for $5 (M s = $26.50 and $27.20; F(1, 135) < 1, NS). In contrast, when the pendant was offered on promotion for free, willingness to pay was significantly higher in the $299 condition than in the $99 condition (M s = $65.17 and $37.43; F(1, 135) = 6.26, p <.05). As shown in Figure 4, consistent with our conceptualization, willingness to pay was more strongly influenced by the minimum purchase amount when the supplementary product was on promotion for free than at a low discounted price. Two separate ANOVA s revealed that participants evaluations of the promotions were significantly affected by minimum purchase amount, but not by the price of the supplementary product or the two-way interaction. Not surprisingly, participants perceived the promotion to be more effective (M s = 3.10 and 2.70; F(1, 135) = 7.41, p <.01) and greater (M s = 2.88 and 2.51;

12 12 F(1, 135) = 6.95, p <.01) when the minimum purchase requirement was $99 rather than $299. Perceptions of the pendant quality were marginally higher in the $299 condition than in the $99 condition (M s = 2.80 and 2.58; F(1, 135) = 3.42, p <.07). No other effects were significant. [Insert Figure 4 here] Method and Results of Study 3b Study 3b was a replication of Study 3a in a different product category. One-hundred and ninety participants saw an ad from a local winery offering a wine thermometer for free or $5 when they purchased a bottle of wine for $50 or a box with six bottles of wine for $300. Participants were asked to consider the wine thermometer as a gift for a friend who really enjoyed wine and indicate their willingness to pay for the product. Thirty-six participants were eliminated for failing the attention check (not being able to recall the value of the promotional price of the thermometer). An ANOVA on WTP with the remaining participants revealed significant main effects for thermometer price (F(1, 150) = 11.68, p <.001), wine price (F(1, 150) = 6.24, p <.05), as well as the two-way interaction (F(1, 150) = 6.32, p <.05). As shown in Figure 5, WTP for the supplementary product was affected by the price of the focal product in the free condition (M $50 = $13.62 vs. M $300 = $24.12, F(1, 86) = 10.90, p <.001), but not in the $5 condition (M $50 = $11.73 vs. M $300 = $11.69, F(1, 64) < 1, NS). As in Study 3a, participants were also asked to indicate the extent to which they agreed with the following statements: It is a great promotion, This is an effective promotion, and The wine thermometer is probably of high quality. ANOVA s on each measure failed to reveal any effects (all p s >.15). [Insert Figure 5 Here] Discussion of Studies 3a and 3b We have proposed that when a product is offered for free, zero will not be used as an anchor to estimate its value. In contrast, when a product is offered at a low price, this price will be used as a natural anchor to estimate its value. Study 3 provides strong support for this hypothesis. Consistent with our prediction, the willingness to pay for the pendant was strongly influenced by the main purchase amount when it was offered on promotion for free. The willingness to pay for the stand-alone pendant increased by almost 74% as the minimum purchase amount increased from $99 to $299. In contrast, when the pendant was promoted for $5, willingness to pay for it was not affected by minimum purchase amount. Similarly, willingness to pay for the wine thermometer in the free condition increased by 77% as value of the main product rose from $50 to $300. In contrast, willingness to pay for the wine thermometer was not affected by the price of the main product when it was promoted for $5. Another interesting aspect of these results is that the promotional value of free or $5 did not influence promotion perceptions. Previous research (Shampanier et al. 2007) suggests that free promotions induce more positive affect than low price promotions and therefore one might expect that free promotions were perceived to be better. As discussed, an important distinction between the context of the current research and that of Shampanier et al. (2007) is that in conditional promotions, an initial purchase is required. As such, free with purchase is not completely free and this may eliminate the positive affect caused by a truly free offer. STUDY 4

13 13 Study 4 builds on the three previous studies and seeks to provide further evidence for the proposed fundamental difference between free and non-free promotions. We have argued that when a product is offered for free, consumers do not automatically try to come up with a value for the product. This leaves the valuation process more subject to contextual influences, most notably that of other incidental anchors. In this sense, a free offer is similar to a control condition, in which no price for the promoted product is given. Therefore the first goal of Study 4 is to show that the value of a free product is influenced by other anchors in the same way as the value of a product in a control condition. In Studies 3a and 3b, we manipulated the value of the focal purchase as a contextual factor that could serve as an incidental anchor for the value of the supplementary product. In the current study, we employ a different manipulation. In some conditions, we ask participants whether they would buy the product for a specific price. This question is intended to provide a natural price anchor, which should subsequently affect valuation of the product. We predict that making consumers explicitly think of the price of the product will attenuate the influence of an incidental anchor on willingness to pay in both the control and free conditions. In this study, the required purchase was fixed at $200 and the promotion prices of the supplementary product varied as free, $1, $15 and no value specified. The promoted product was a transparent toaster. We varied the purchase price question at the same levels (no question, $0, $1 and $15) for a full-factorial design. Given the relative high value of the required purchase, we expect that in the absence of the purchase price question, estimates would be influenced by this price ($200) and as such would be relatively high. However, in the presence of a purchase price question, we predict that the willingness to pay for the transparent toaster will be lower in the free and control conditions than when the purchase price question is not asked. We also proposed that compared to free offers, non-zero price offers lead consumers to use the discounted price as a natural anchor. Indeed, results from Studies 3a and 3b indicate that promotions with non-zero prices are less subject to influences from potential incidental anchors, like the price of the focal product or required purchase. Thus, the second goal of Study 4 is to provide further evidence through a different manipulation that willingness to pay for non-zero promotions are less influenced by other anchors. In the current study, our manipulation of purchase price question provides participants with a natural anchor for their estimates. As reasoned, we expect this anchor to have a large impact in the free and control condition, offsetting the impact of the incidental anchor (required purchase value). In contrast, because participants in the non-free promotions condition had already been exposed to a natural anchor, we expect their estimates to be less influenced by the presence of another natural anchor. As a result, we predict that the impact of asking a purchase price question on willingness to pay will be stronger in the free and control conditions than in the non-zero conditions. The third goal of Study 4 is to rule out alternative explanations. Results from previous research suggest that free promotions induce more positive affect than low price promotions (Shampanier et al. 2007). In other words, one could argue that the higher valuation of products when offered for free relative to those offered for a low price are driven by positive feelings elicited by the free promotion. In a similar vein, one could argue that free promotions trigger a feeling of reciprocation toward the retailer, which would lead free offers to be perceived as more valuable. We should note that we did not find any difference in evaluation of promotion in Studies 3a and 3b casting some doubt that, in our context, free promotions are perceived as better than low price promotions. Nevertheless, we conduct a more thorough test of this alternative

14 14 explanation by measuring participants evaluation of the promotion, feelings about the promotion, and feelings toward the retailer. Finally, another alternative explanation is that participants perceive non-zero prices as containing some information about the true price of the product. Although they recognize that the low discounted price is not the real price, they could still think that it gives them a rough idea of the value of the product. This explanation seems unlikely given that we found significant differences between $0.00 and $0.01 in Study 2, but we directly test it in this study, measuring participants perceptions of informativeness of the promoted price. Method Participants were 806 U. S. residents, members of mturk online panel ( Age ranged from 17 to 75, with a median of 28, and 62% were male. They were assigned at random to one of 16 conditions in a 4 (promotion: control vs. free vs. $1 vs. $15) x 4 (purchase price question: control vs. $0 vs. $1 vs. $15) between-subjects full factorial design. Participants saw a picture of a transparent toaster and read the following text: Consider this promotion from a large retailer last December. This holiday season, we are celebrating our 20 th anniversary and we have a very special promotion! If you spend more than $200 with us this month, we will be giving you this new and stylish Transparent Toaster for [a very special price/free/only $1/only $15]! This is sure to be a great addition to your home or a gift to a friend! Participants were then asked to evaluate the promotion (1 = Not good at all, 7= Exceptional; 1 = Not a good value at all, 7 = Extremely good value; 1 = Not appealing at all, 7 = Extremely appealing) and indicate how they felt about it (1 = Not happy at all, 7 = Extremely happy; 1 = Not excited at all, 7 = Extremely excited; 1 = Not interested at all, 7 = Extremely interested). Participants also indicated how they felt about the retailer (1 = Not positive at all, 7 = Extremely positive; 1 = Not grateful at all, 7 = Extremely grateful; 1 = Not appreciative at all, 7 = Extremely appreciative; 1 = Very distant to the retailer, 7 = Very close to the retailer; 1 = Not interested in the retailer, 7 = Very interested in the retailer). Participants then moved to a new screen, in which the second factor was manipulated. In three purchase price conditions, participants were asked whether they would pay more than [$0/$1/$15] for the transparent toaster (yes/no). Participants in the purchase price control condition were not asked this question. All participants then indicated the price they would be willing to pay for the transparent toaster. Finally, participants in the conditions in which the toaster had a promotional price (free, $1, $15) were asked to indicate how much the promotional price of the toaster told them about the regular price of the toaster, the quality of the toaster, the cost of the toaster to the retailer, and the quality of the retailer s products on seven-point scales (1= Nothing, 7 = A lot). Participants then completed the study by answering a few demographics questions. Results Fourteen of the 806 participants did not provide a value for the WTP measure and could not be used in the WTP analysis. An ANOVA on WTP revealed main effects for promotion (F(3, 776) = 12.28, p <.001), purchase price question (F(3, 776) = 20.95, p <.001), as well as a significant two-way interaction (F(9, 776) = 2.01, p <.05). Figure 6 shows that the effect of the promotion factor is such that control and free are very similar to each other, while the $1 and $15 price promotion conditions also are also similar in pattern. [Insert Figure 6 Here]

15 15 Free may not lead to devaluation. We have argued that a free promotion does not automatically lead to devaluation. Rather, a zero price tends to be ignored and consumers tend to be influenced by incidental anchors such as the price of the focal product. As a result we have predicted that WTP in zero and control conditions would not differ. In order to test that, we ran a series of contrasts comparing control and free promotion condition for each of the purchase question conditions. As predicted, the willingness to pay did not differ significantly across the control and free conditions when there was no purchase question (M control = $39.89 vs. M free = $42.56; F(1, 776) =.42, p >. 50), when there was a $0 purchase price question (M control = $20.92 vs. M free = $28.04; F(1, 776) =. 3.25, p <. 10), when there was a $1 purchase price question (M control = $21.73 vs. M free = $24.20; F(1, 776) =.36, p >. 50) or when there was $15 purchase price question (M control = $21.72 vs. M free = $19.09; F(1, 776) =.41, p >. 50). An ANOVA (2 x 4) comparing only the control and free promotion conditions also supported these findings by showing no effect of promotion (F(1, 384) = 1.05, p >.30), a main effect of purchase price question (F(3, 384) = 15.81, p <.001), and an insignificant two-way interaction (F(3, 384) =.73, p >.50). [Insert Table 1 Here] Overall, these results indicate that willingness to pay for the toaster in the free condition did not differ from the control condition (M control = $26.07 vs. M free = $28.47). These results replicate Studies 1a and 1b and provide further evidence that participants in these two conditions processed information similarly and, as such, their estimates of the price they were willing to pay were similarly affected by the purchase price questions. Non-zero prices lead to devaluation. We have argued and shown that a promotion offering a product for a low price will devalue the product more than a promotion offering it for free. In Study 4, we also tested a higher promotional price to test the limits of this devaluation effect relative to free and control conditions. We first ran contrasts comparing $1 to control and free conditions in the no question condition. When there was no purchase question, a $1 price promotion significantly lowered WTP relative to the control and free promotion conditions (M $1 = $26.92 vs. M control = $39.89; F(1, 776) = 10.51, p <.001; M $1 = $26.92 vs. M free = $42.56; F(1, 776) = 14.47, p <.001). Contrasts comparing $15 to control and free conditions also showed that a $15 price promotion lowered WTP (M $15 = $22.02 vs. M control = $39.89; F(1, 776) = 20.53, p <.001; M $15 = $22.02 vs. M free = $42.56; F(1, 776) = 25.63, p <.001). This not only replicates the pattern we have obtained in previous studies, but extends the impact of our findings to promotions with much higher prices. We also ran a series of contrasts comparing $1 and $15 to control and free when different purchase values were considered. When a price of zero was explicitly considered, $1 and $15 price promotions still lowered WTP relative to the free condition (M free = $28.04 vs. M $1 = $18.36; F(1, 776) = 6.03, p <.05; M free = $28.04 vs. M $15 = $15.66; F(1, 776) = 9.99, p <.01), but not relative to the control condition. All comparisons are shown in Table 1 indicating that the presence of a purchase question decreased the differences in WTP. This is discussed in more detail in the next sub-section. Finally, a 2x4 ANOVA considering only $1 and $15 price promotions revealed a main effect for purchase price (F(3, 392) = 6.08, p <.001), but no effect for promotion (F(1, 392) = 2.40, p >.10) and no interaction (F(3, 392) =.36, p >.70). These results indicate that the promotion conditions of $1 and $15 did not differ significantly from each other in terms of willingness to pay but also as a function of the price purchase question manipulation.

16 16 Value of free products is more affected by a natural anchor. As shown in our initial analysis, the purchase price question had an main effect on WTP (F(3, 776) = 20.95, p <.001). An examination of Figure 6 suggests that this effect is driven by a difference between the control condition (no purchase question) and the remaining conditions. Indeed, average WTP in the no purchase question was $32.85, compared to $20.70, $19.16 and $19.71 in the $0, $1, and $15 price purchase question conditions, respectively. We ran six ANOVA comparing every pair of conditions to test the significance of these results. Our analysis revealed that when there was a purchase question, its specific value made no difference (F $0 - $1 (1, 401) =.78, p >.30; F $0 - $15 (1, 395) =.29, p >.50; F $1 - $15 (1, 382) =.78, p >.30). In addition, the influence of each purchase price question was significantly different from the control condition (F control - $0 (1, 406) = 23.15, p <.001; F control - $1 (1,393) = 31.38, p <.001; F control - $15 (1, 387) = 29.69, p <.001). Given that all purchase price questions had the same impact, we grouped the three purchase price question conditions ($0, $1, and $15) and conducted a new ANOVA with promotion type and purchase price question (present, absent) as the independent variables. As with our original 4 x 4 analysis, this new ANOVA also revealed main effects for promotion type (F(3, 784) = 16.51, p <.001) and purchase price question (F(1, 784) = 62.29, p <.001) as well as an interaction (F(3, 784) = 3.98, p <.01). We have argued that when participants see a free promotion they do not use zero as an anchor to estimate value. Rather, they end up being influenced by an incidental anchor, such as the required purchase ($200 in this study). In contrast, non-zero price promotions make consumers use the non-zero price as a natural anchor. As a result, compared to those in the free condition, they are less influenced by a natural anchor in the form of a purchase question. Consistent with our predictions, one can see in Figure 7 that while a purchase question brought estimates down in all promotion conditions, this effect was much more pronounced in the control and free conditions than in the $1 and $15 price promotion conditions. Separate 2 x 2 ANOVA s comparing every promotion condition confirmed the significance of this analysis. An ANOVA comparing control and free promotion conditions showed no interaction (F(1, 388) =.00, p >.90). The same result was obtained in an ANOVA comparing $1 to $15 (F(1, 396) =.69, p >.40). Each of the other four comparisons showed an interaction: F control - $1 (1, 398) = 3.44, p <.07; F free - $1 (1, 382) = 4.24, p <.05; F control - $15 (1, 402) = 7.40, p <.01; F free - $15 (1, 386) = 9.73, p <.01). These results indicate that estimates in free and control conditions are much more influenced by an explicit consideration of a natural anchor than those in the non-zero promotions. [Insert Figure 7 Here] Excitement about promotion does not affect WTP. All measures of promotion evaluation were taken before the purchase price question manipulation and as such could not have been influenced by this factor. Indeed, an ANOVA using promotion type and purchase price question as factors showed no main effect for purchase price questions or an interaction in any of the measures (all p >.10). However, we found a main effect for promotion type on all six measures (all p <.05). As can be seen in Table 2, for five of the six measures, there was no difference among control, free, and $1 conditions. In the remaining measure (the extent to which the promotion was a good value), $1 was no different from free, but viewed as better than the control condition. In contrast, in the $15 condition, all averages were significantly lower than free and $1 conditions. Finally, compared to the control condition, averages for the $15 condition were

17 17 significantly lower in two measures and marginally or close to for the other four measures (pvalues ranging from.06 to.13). [Insert Table 2 Here] Feelings toward the retailer do not affect WTP. As with the previous measures, purchase price question had no impact (all p >.40) as this factor was manipulated after these measures were taken. However, we also found a main effect of promotion type in three of the five measures (gratitude, appreciation and interest all p <.05) and a marginally significant effect on the remaining measures (positivity, closeness both p <.10). As can be seen in Table 3, there were no differences for any of the five measures between control, free, and $1 conditions. Compared to each condition, averages for the $15 condition were significantly or marginally lower. These results suggest that affective reactions toward the promotion or the retailer played no role in the willingness to pay results. Averages of affective reactions for free and $1 conditions did not differ, but willingness to pay differed. In addition, comparing the $1 and $15 promotion conditions, there was no difference in willingness to pay, but significant differences in affective reactions. [Insert Table 3 Here] Meaningfulness of promoted prices cannot explain WTP results. Since, the promotional price was not provided in the control condition, these questions were only asked in the other three conditions. An ANOVA revealed a main effect of promotional price on regular price (F(2, 588) = 12.58, p <.001) and marginal effect on quality of products (F(2, 588) = 2.48, p <.10). As can be seen in Table 4, further comparisons showed that participants viewed a promotional price of $15 as more indicative of the regular price of the toaster than a promotional price of $0 or $1 (both p <.05). Importantly, a $1 promotional price was not viewed as more meaningful than a $0 promotional price. In fact, it was viewed as marginally less indicative of the regular price of the toaster (p <.07). Averages in the free condition did not differ from those in the $1 or $15 condition in any other measure (quality of toaster, cost of toaster, and quality of products). [Insert Table 4 Here] Discussion Study 4 makes several important contributions to our investigation. First, it replicates results from Studies 1a and 1b showing no difference in willingness to pay between control and free conditions when there was no purchase price question. Further, Figure 7 shows that the influence of the purchase price question factor was similar across the control and free promotion conditions. These findings provide further evidence that free promotions may not devalue the product. While this finding may seem contrary to Raghubir (2004), it is not at odds with her findings. We come back to this point in the general discussion. We have argued that non-zero price promotions lead consumers to use the discounted price as a natural anchor and as such, consumers who are exposed to a non-zero price promotion are less influenced by other anchors, such as questions about whether they would purchase the product for a given price. As predicted, the purchase price question factor was more impactful in the control and free conditions than in the $1 and $15 promotion conditions. It is interesting to note that explicitly considering whether one would make a purchase for $0 brought estimates substantially down in the free promotion condition (from $42.56 to $28.04). This suggests that

18 18 while $0 can serve as an anchor, when consumers see a free promotion, they do not naturally use it as an anchor to estimate value of the product. Another interesting aspect of these results is that considering a purchase for $0, $1 or $15 had a similar effect across conditions. Based on anchoring and adjustment, we did not expect differences in the impact of $0 and $1, as these values are quite close, but we did expect them to push estimates further down compared to a $15 anchor. We do not view this null effect as theoretically meaningful as it may simply indicate that these anchors were not different enough in this context. Similarly, it is also surprising that there was no difference between a $1 promotion and a $15 promotion. Given the results of Studies 1a and 1b, we expected to find that willingness to pay following a $15 promotion would be greater than following a $1 promotion. This could also reflect that in this context these values were not perceived as sufficiently different. However, we speculate that a $15 promotion was an especially effective anchor because this price was viewed as more representative of the real price of the toaster, as shown by the meaningfulness of promotion price measure. In line with that, we found that the standard deviation for WTP in this condition was the lowest of all (STD $15 = $13.92 vs. STD $1 = $19.21 vs. STD free = $22.27 STD control = $26.34). Finally, Study 4 successfully refutes important alternative explanations. Free and $1 promotions were viewed as equally attractive and led to the same feelings toward the retailer. Importantly, attractiveness of the promotion and feelings toward the retailer in the $15 condition were significantly lower and yet results for the WTP in this condition were the same as those in the $1 condition. We believe this provide strong evidence against an account based on positive affect or feelings of indebtedness and reciprocation elicited by a free promotion. Another potential rival explanation to our effect was that perhaps non-zero offers were more influential in judgments of product value because participants view the promotional price as communicating a rough idea about the real price of the product. Results from the current study show that a promotional price of $1 was not viewed as communicating more information about the real price of the toaster than a zero price. In fact, a zero price was considered as marginally more indicative of the real price of the toaster. If this was driving the difference between free and $1 promotions, we should see a free offer leading to lower value estimates than a $1 promotion, but as in all of our studies, a free offer led to higher estimates than non-zero promotions. GENERAL DISCUSSION The primary objective of this research was to examine how the promotional price of a product affects consumers judgement of its value. In particular we were interested in promotions that offer a product for free or for a low discounted price. Previous research has proposed inferential processes to account for the devaluation of free offers (Kamins et al. 2009; Raghubir 2004). From this perspective, consumers evaluating promotions that offer a free gift with purchase would reason that the gift should be of low cost in order to be given for free (Raghubir 2004), or that the focal product should be of lower quality in order to necessitate to be promoted with a free gift (Kamins et al. 2009; Raghubir 2004). From an inferential process perspective, one should expect that if a zero price devalues a product, prices above zero should devalue it less. In contrast, we proposed and demonstrated in a series of studies using over 1500 respondents that the price that consumers are willing to pay for a product when a promotion is retracted is higher when it was offered for free than when it was offered for a low price. Importantly, we show that free promotions may not devalue the product after all. Adding to the

19 19 growing body of literature on price promotions, this research shows that an anchoring and adjustment process best describes how consumers estimate the value of a discounted product. Further, this research contributes to the literature on the special properties of zero documenting a discontinuity in the transition from small numbers to zero. While previous research has shown that people overreact to free components (Chandran and Morwitz 2006) as well as free product offers (Shampanier et al. 2007), this research suggests that zero price offers the benefit of not serving as an anchor thus necessitating the use of other contextual information in estimating product value. Studies 1a and 1b began the investigation by demonstrating that the price that consumers are willing to pay for the stand-alone supplementary product is higher when it is offered for free during the promotion than when it is offered at a low discounted rate. This finding is inconsistent with value discounting hypothesis which suggests that the lower the promoted price of the supplementary product, the lower consumers cost inferences about the product thereby leading to lower willingness to pay for the product when it is not on promotion. In addition, there is a school of thought which suggests that consumer perceptions and valuations are likely to be lower when something is offered for free than for some price. Importantly, Study 1a shows that while low promotional prices led to lower willingness to pay relative to a control condition, a free promotion did not result in lower WTP. Study 2 further demonstrates the robustness of the effect by showing that the willingness to pay for a product does not vary based on whether the price on promotion is represented as free or $0.00 and more importantly that even a price of $0.01 is used as anchor considerably reducing willingness to pay and price estimates in comparison to a free price condition. This is an important finding as it rules out an alternative explanation based on price implausibility. It is difficult to argue that $0.00 is an implausible price for products like chocolate mousse and tomato sauce, but $0.01 is not. Studies 3a, 3b, and 4 provide more direct evidence for the proposed anchoring and adjustment process. We argued that because free promotions are so common and involve no cost, consumers do not try to figure out the value of the free offer. In contrast, promotions that are non-free make consumers focus on the promoted price. This may occur for two reasons. First, because a non-zero price involves a cost and as such one may need to consider the value of the product to determine whether the promotion is a good deal. Any product for free is a net gain, but once one has to pay something, one needs to consider the value of what is being obtained. Second, a non-zero low price may be less common than a free offer and as such bring more attention to it. As a result, a non-zero price is used as anchor in a conditional promotion context, but a zero price is not. Instead, in this case, consumers are affected by incidental anchors such as the price of the focal product. Studies 3a and 3b show that the willingness to pay for the stand-alone supplementary product does not differ with the price of the focal product when the supplementary product is offered on promotion for a low discounted price. In contrast, consumers willingness to pay for the supplementary product increases with the price of the focal product when the supplementary product is offered on promotion for free. These results attest to our reasoning that since $0 is not used as anchor, willingness to pay is much more susceptible to the price of the focal product when the supplementary product is free. Study 4 uses a different manipulation of an alternative anchor. Keeping the price of the focal product fixed, it shows that explicit price comparisons have a larger impact on free promotions than on non-free promotions. This provides further evidence that consumers do not spontaneously estimate value of free offers, which make these

20 20 estimates more susceptible to the influence of contextual cues, such as other anchors (i.e., the purchase price question). Study 4 is also instrumental is rejecting alternative accounts based on positive affect, feelings of reciprocation, and consumer s deriving meaning from the promoted price. In addition, Study 4 extends the importance of our findings showing that they are not restricted to a contrast between low price and free promotions. Results from this study showed that even a relatively high promoted price of $15 for a transparent toaster, which was valued at just over $17 in this condition led to lower estimates than a free promotion. The managerial implications of our results are straightforward. First, marketers should be aware that promotions with low prices devalue products more than free offers. Second, free offers may not devalue products at all, as consumers use the price of the focal product to estimate value of the supplementary product. In this sense, one may even raise perceptions of value of a product by offering it for free with an expensive purchase. Finally, in terms of underlying mechanism we believe we have provided compelling evidence for an anchoring and adjustment process, for differences in susceptibility of free and non-free offers to the influence of other anchors, and for a difference in the nature of the anchor for free and non-free promotions. We have proposed that this difference occurs due to the commonality of free offers and to the lack of necessity of assessing its net gain. While the price of a non-zero promotion itself serves as a natural anchor, the $0 associated with a free offer is susceptible to incidental anchors such as the price of the focal product. Consistent with the findings of Raghubir (2004), willingness to pay for a product when not on promotion varied directly with the price of the focal product. However, we show that willingness to pay across the control and free promotion conditions did not differ significantly across many studies. Our results more clearly demonstrate that the free promotion does not devalue the promoted product. Kamins et al. (2009) suggest that free promotions may indeed devalue a product. Future research should look into conditions under which a free promotion will and will not lead to devaluation. The price of the focal product and the perceived quality of the focal product in its category may be key variables that determine whether and to which extent a free offer devalues a product.

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23 23 FIGURE 1 MEAN WILLINGNESS TO PAY (STANDARD DEVIATIONS) FOR BREAD STICKS (STUDY 1A) $5.69 (3.38) $5.06 (3.73) $3.91 (2.57) $2.76 (1.67)

24 24 FIGURE 2 MEAN WILLINGNESS TO PAY (STANDARD DEVIATIONS) FOR SPAGHETTI (STUDY 1B) $2.94 (1.09) $2.95 (1.37) $2.53 (1.15) $1.83 (1.00)