British Food Journal

Consumer behavior in food consumption: reference price approach

Dragan Miljkovic Cary Effertz
Article information:
To cite this document:
Dragan Miljkovic Cary Effertz, (2010),"Consumer behavior in food consumption: reference price approach",
British Food Journal, Vol. 112 Iss 1 pp. 32 - 43
Permanent link to this document:
http://dx.doi.org/10.1108/00070701011011182
Downloaded on: 30 January 2016, At: 15:46 (PT)
References: this document contains references to 43 other documents.
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

To copy this document: permissions@emeraldinsight.com

The fulltext of this document has been downloaded 3579 times since 2010*
Users who downloaded this article also downloaded:
Justin Paul, Jyoti Rana, (2012),"Consumer behavior and purchase intention for organic food", Journal of
Consumer Marketing, Vol. 29 Iss 6 pp. 412-422 http://dx.doi.org/10.1108/07363761211259223
Larry Neale, Sam Fullerton, (2010),"The international search for ethics norms: which consumer behaviors
do consumers consider (un)acceptable?", Journal of Services Marketing, Vol. 24 Iss 6 pp. 476-486 http://
dx.doi.org/10.1108/08876041011072591
Jinkyung Choi, Jinlin Zhao, (2014),"Consumers' behaviors when eating out: Does eating out change
consumers' intention to eat healthily?", British Food Journal, Vol. 116 Iss 3 pp. 494-509 http://
dx.doi.org/10.1108/BFJ-06-2012-0136

Access to this document was granted through an Emerald subscription provided by emerald-srm:368748 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for
Authors service information about how to choose which publication to write for and submission guidelines
are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee
on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.

*Related content and download information correct at time of download.


BFJ
112,1
32
Received 24 September 2007
Revised 8 June 2008
Accepted 18 June 2008
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)
British Food Journal
Vol. 112 No. 1, 2010
pp. 32-43
q Emerald Group Publishing Limited
0007-070X
DOI 10.1108/00070701011011182
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0007-070X.htm
Consumer behavior in food
consumption: reference price
approach
Dragan Miljkovic
Department of Agribusiness and Applied Economics,
North Dakota State University, Fargo, North Dakota, USA, and
Cary Effertz
University of Minnesota, St Paul, Minnesota, USA
Abstract
Purpose – The purpose of this paper is to show that empirical analysis of consumption of a good,
using the same empirical and econometric model as it is done in standard applied demand analysis,
may be based on the underlying behavioral model other than the rational choice.
Design/methodology/approach – Reference point approach originally developed by psychologists
and later translated into reference price approach by business scholars is used to demonstrate this
point. Empirically, a model of consumption of broilers in the USA is estimated using regression
analysis and its results and implications are discussed.
Findings – The same empirical model can be used to represent more than one underlying model of
consumer behavior.
Research limitations/implications – This paper raises the question of which underlying
behavioral theory is valid, and under what circumstances might that validity change. The importance
of accounting for reference prices appears to be validated, but the fact that both theories lead to the
same or similar empirical formulation does little to secure either theory as right or wrong.
Originality/value – Research in consumer behavior and demand generally assumes the existence of
one superior theoretical behavioral model. This paper suggests that such claims are unfounded since
standard current empirical modeling of consumer behavior accommodates more than one underlying
theory.
Keywords Consumer behaviour, Consumption, Food products, Poultry, Meat, United States of America
Paper type Research paper
1. Introduction
Economic analysis of consumer behavior and decision making under risk has
traditionally and predominantly been based on expected utility following von
Neumann and Morgenstern (1944). The expected utility rule has been derived from a
set of simple principles of rational choice that make no reference to long-run
considerations. The axiomatic nature of rational choice has its foundation in four
substantive basic assumptions: consistency, transitivity, dominance, and invariance,
and two technical assumptions: continuity and comparability. Although these axioms
are sometimes known by other names (Kreps, 1990; Mas-Colell et al., 1995), they
represent the same properties and are crucial to the effective use of expected utility
theory. The importance of expected utility theory and rational choice axioms has been
 much more than academic only since consumer demand is derived based on this Consumer
theory. behavior in food
Several economists and many behavioral scientists in the past few decades have
begun to doubt the axioms of rational choice. The witnessed systematic failure of these consumption
axioms in positive analysis has been too common to be written off as individuals
behaving irrationally. Several theories have been developed to account for consistent
deviations from these assumptions. These theories utilize the behavioral tendency of 33
individuals to view the change from their current state or recent past state as the true
carrier of value rather than the level or absolute state itself (as expected utility theory
indicates). Support for this concept of reference points and the axiomatic failure of the
theory of rational choice has been demonstrated in survey and experimental data
(Miljkovic, 2005; Tversky, 1969; Tversky and Kahneman, 1981). Consumer behavior
theories utilize this concept in the form of reference prices, i.e. the consumer bases
consumption choices on the change from the reference price to the current price. The
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

most commonly used theories that utilized the reference price concept have been
assimilation contrast theory (Sherif and Hovland, 1961; Urbany et al., 1988;
Lichtenstein and Bearden, 1989; Kalyanaram and Little, 1994) and prospect theory
(Kahneman and Tversky, 1979; Tversky and Kahneman, 1992).
Applied demand analysis and consumer choice are generally assumed to be derived
from the expected utility theory and rational choice axioms. The objective of this paper
is to show that empirical analysis of consumption of a good, using same empirical and
econometric model as it is done in standard applied demand analysis, may be based on
underlying behavioral model other than the rational choice. To demonstrate this point
empirically, a model of consumption of broilers in the USA is estimated and its results
and implications are discussed.
The paper is organized as following. Section 2 contains literature review on basic
tenets of rational choice, its criticism, and on alternative theories of consumer behavior.
Section 3 describes the model and the data used in the analysis. In Section 4, empirical
results and their implications are presented. Finally, the last section concludes the
paper.

2. Normative versus positive theories of consumer choice

The normative theory of rational choice is the cornerstone of modern microeconomics
and the first theory we address. We will describe and order the four basic substantive
assumptions by their normative appeal. First is the consistency (cancellation) condition
which has been challenged in the past by several economists, while last is the
invariance (extensionality) condition which has been accepted by almost all
economists. Consistency is described by Miljkovic (2005, p. 624) as “[. . .] the
elimination of any state of the world that yields the same outcome regardless of one’s
choice.” This simply states that if an individual chooses an element x of large set A1,
and the element is a member of the smaller subset A2, then the individual will choose x
from the subset A2. Transitivity refers to the condition that relates the condition that if
the consumer prefers (or is indifferent to) x over y and y over z, then they will prefer (or
by indifferent to) x over z. Dominance can be described as a choice between two goods
x and y, where x is superior in one state and equal (or superior) to y in all other states,
then x will be selected. The invariance assumption states that choice or preference in a
situation should be independent of the description, i.e. the decision maker should
 BFJ choose the same alternative when presented with two descriptions of the same
112,1 problem[1].
The failure of these assumptions has been illustrated in many studies using
experimental survey questions. The failure of consistency is illustrated using the
certainty effect (Allais, 1979; Tversky and Kahneman, 1981). Both articles illustrate this
certainty effect as the over-weighting of outcomes obtained with certainty as opposed to
34 those that are only probable. The transitivity assumption was shown to be violated
using the preference reversal principle when participants were presented with a series of
options with decreasing price and their increasing probability (Slovic and Lichtenstein,
1983; Tversky et al., 1990). Contrasting risk attitudes are used to illustrate the failure of
dominance (Kahneman and Tversky, 1979; Miljkovic, 2005), i.e. when choosing between
two favorable choices and choosing between two unfavorable choices, the assumption of
dominance is violated. Finally, the assumption of invariance fails with framing effects,
showing that the structure of question presentation does indeed affect the choice
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

outcome (Kahneman and Tversky, 1979; Kreps, 1990; Miljkovic, 2005).

While some economists have also observed the failure of consistency long ago,
they were not ready to give up normative choice theory based on the violation of
consistency condition only. They designed models that either abandoned the consistency
(cancellation) condition altogether (Machina, 1982) or replaced the consistency
(cancellation) condition by a weaker substitution axiom (Chew, 1983; Fishburn, 1983)
while including transitivity, dominance, and invariance. Bilinear models of risky choice
with non-additive probabilities assume various restricted versions of cancellation and
construct a bilinear representation in which the utilities of outcomes are weighted by a
non-additive probability measure or by some nonlinear transform of the probability scale
(Quiggin, 1982; Luce and Narens, 1985). Finally, non-transitive models represent
preferences by a bivariate utility function. These models were reviewed and axiomatized
by Fishburn (1984), while Loomis and Sugden (1982) interpreted them in terms of
expected regret. Comprehensive reviews of these and similar theories can be found in
Camerer (1992) and Fishburn (1988). The important thing to understand here is that none
of these normative models or variations of the rational choice dealt with the failures of
either dominance or invariance. According to Arrow (1982), “The most damning
criticism of risk-benefit analysis from experiments is the evidence for what Tversky and
Kahneman (1981) have called framing.” Because invariance and dominance are
normatively indispensable, no adequate prescriptive theory should permit their violation.
And in reality, the usefulness of economic analysis becomes extremely limited if its
prescriptive role, either in policy or business decision making, is ignored and/or
abandoned.
The only theory of choice capable of explaining the failures of all four substantive
conditions in normative rational choice theory is prospect theory (Kahneman and
Tversky, 1979; Tversky and Kahneman, 1992). It is a purely positive choice theory. It can
be briefly summarized as follows. Value is assigned to gains and losses rather than to
final states, i.e. the objects of choice are prospects framed in terms of gains and losses[2].
Probabilities are replaced by decision weights. The valuation rule is two-part
cumulative functional. An “S” shaped value function is created that illustrates the
tendency of individuals to view gains and losses (not final states) as the real carriers of
value. This value function is defined by deviations from the “reference point” of the
decision maker. Unlike traditional expected utility theory that is categorized by concave
 “U” shaped utility curves, the prospect theory value function has a concave and a convex Consumer
section. The value function is normally concave for gains and convex for losses (“S” behavior in food
shaped). It is generally steeper for losses than for gains. The weighting function is
inverse “S” shaped. Decision weights are generally lower than the corresponding consumption
probabilities, except in the range of low probabilities. For instance, over-weighting of
small probabilities contributes to the popularity of both insurance and lottery. On the
other hand, underweighting of high probabilities contributes both to the prevalence of 35
risk aversion in choices between probable gains and sure things, and to the prevalence of
risk seeking in choices between probable and sure losses. Risk aversion for gains
and risk seeking for losses are further enhanced by the curvature of the value function in
the two domains. The pronounced asymmetry of the value function, which is in this
theory labeled as loss aversion, explains the extreme reluctance to accept mixed
prospects. The shape of the weighting function explains the certainty effect. It also
explains why this phenomenon is most readily observed at the two ends of the
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

probability scale, where the curvature of the weighting function is most pronounced.
The key characteristic of the prospect theory for us is that the consumer choice is
made based on gains and losses rather than the level or final state, i.e. the objects of
choice are prospects framed in terms of gains and losses. Although the prospect theory
is a general choice theory and supports the concept of gains and losses relative to a
“reference” value of any choice variable, our interest, being economists, rests primarily
with consumer choice, and change in prices. A basis for the concept of reference prices
can be found in an article by Watson (1957). He lays the groundwork of reference prices
from a psychological standpoint. Watson specifically addresses the tendency of an
individual to judge a stimulus by comparing it to other stimuli encountered in an
appropriately recent time frame. He indicates that when two equal in magnitude
stimuli are presented in a short-time interval, the second stimuli is judged in proportion
to the first. When both stimuli are relatively small, the second is perceived to be smaller
than the first. In contrast, when both stimuli are relatively large, the second is
perceived to be larger than the first. The phenomenon, known as the central-tendency
theory, is explained by the assimilative and the contrast theories. Both theories identify
a central level that the series of stimuli are compared to, a sort of reference based on the
collective set of stimuli. This psychophysical behavior of comparing and contrasting
stimuli was placed into a consumption frame by Monroe (1971). Monroe, in a
clarification of another article, applies Weber-Fechner law to prices. Weber-Fechner
law states that people respond to a proportional change in a stimulus, i.e. their response
to the stimulus are in a fixed proportion to the magnitude of the stimulus. The stimulus
in this situation is the price and the quantity purchased is the response. The magnitude
of the stimulus is measured as the deviation from the individual’s frame of reference.
Prospect theory has been a rarely used alternative to expected utility because it still
has several limitations. Modeling the prospect theory is challenging due to difficulties
such as how to model the reference price and how to specify differences in reactions of
one consumer to the next. For instance, according to Lilien et al. (1992) and Winer
(1988), there are at least five different concepts underlying what makes up an internal
reference price[3]:
(1) fair and just price, meaning what the product ought to cost;
(2) reservation price or the upper threshold limit used by economists to describe the
price just low enough to overcome a consumer’s reluctance to purchase;
 BFJ (3) lowest acceptable price below which the product is perceived to be of inferior
112,1 quality;
(4) expected price or the price consumers think will be charged for the product in
the future; and
(5) perceived price or a price that the consumer pays most frequently, paid last, or
pays, on average, for goods in that category.
36
Also, prospect theory is limited by an inability to permit an area or zone of indifference
(Boztug and Hildebrandt, 2006). Despite the limitations, prospect theory provides a
unique and interesting alternative to expected utility theory.
The relatively short life of the alternatives to the accepted theory of rational choice
has been accompanied by a moderate amount of interest and application in empirical
study but exclusively in marketing research (Winer, 1986; Briesch et al., 1997; Wricke
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

et al., 2000). However, as alternatives to the mainstream economic theory, the prospect
theory has not been applied to the variety of situations that have been studied by more
conventional means. Kahneman and Tversky (1979) called for the extension of their
theory to test its relevance in a wider range of decision problems. They asserted that
prospect theory could be extended into the typical situation of choice, where
probabilities and outcomes are not specifically given. Miljkovic underlined the
importance of investigating the usefulness of alternatives to rational choice in specific
situations. He opined that alternatives “would mean a lower level of abstraction and
generality” (p. 633), while they “would likely enhance the prescriptive role that economic
theory inevitably possesses” (p. 633). To our knowledge, there have been no studies that
utilize reference price theory in analyzing the consumption of agricultural or food
products. A study relating to these areas could expand the scope of applications for the
reference price concept and provide empirical support for some aspects of the prospect
theory as called for by Kahneman and Tversky (1979). In the next section, we explore the
usefulness of reference price concept and the prospect theory in the empirical analysis of
poultry consumption.

3. An empirical specification: consumption of broilers, model, and data

In this paper, we go back to the original work by Watson and use the reference price
where individuals are assumed to judge a stimulus by comparing it to other stimuli
encountered in an appropriately recent time frame. He indicates that when two stimuli
are presented in a short-time interval, the second stimulus or the current price is judged
in proportion to the first stimulus or the previous price. The experimental studies listed
previously present a naı̈ve picture of reality in a way that they do not account for a
multitude of variables that do affect consumer choice but focus on the price of the good
under consideration only. However, it is common knowledge that consumer choice in
general and of meats in particular is affected by more than the own price only including,
among other variables, the price of substitutes, income, change in preferences due to
fads, health concerns, or media influence (Eales and Unnevehr, 1988; Miljkovic and
Mostad, 2005). According to the prospect theory, gains and losses are carriers of the
value, or in other words, determine the choice. In this case, one can say that changes in
variables of interest (e.g. change in the own price, change in the price of substitutes,
change in income or budget available for shopping) are the determinants of choice. This
assumption seems to be very reasonable and applicable to a number of situations.
 Most often when people shop they do mental math and compare the current price with Consumer
the price they paid last or they pay most frequently (Lilien et al., 1999; Winer, 1988). By behavior in food
analogy, in the case of shopping for meats in a supermarket, shoppers most normally
look not only at the price of preferred meat (e.g. broilers) but also at the price of some consumption
close substitutes (e.g. turkey), and compare current prices with, for example, recent
prices of these products. The change in their current budget/income may affect their
choice as well. Then they make their decision if they will buy the product or not. 37
The consumption of meat and poultry (as was the consumption of most other
agricultural products) products has typically been estimated with models based on
rational choice theory. Deaton and Muellbayer (1980) created a system very convenient
for empirical analysis that satisfied the axioms of consumer choice. This almost ideal
demand system (AIDS) has been used to estimate consumer demand for poultry and
other meat products (Eales and Unnevehr, 1988). Eales and Unnevehr (1988, pp. 521-2)
point out specifically that, “The AIDS model (Deaton and Muellbayer, 1980) satisfies
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

the axioms of choice exactly, allows consistent aggregation of microlevel demands up

to a market demand function, [. . .]” Additionally, a variation of this model called the
inverse almost ideal demand system (Eales and Unnevehr, 1993) has been used to
demand for meat and meat products in the US market. Another model for demand
estimation that relies heavily on rational choice theory is the Rotterdam model (Tomek
and Robinson, 2003). To quote Tomek and Robinson (2003, p. 44), “The two most
popular models for statistical estimation of demand systems for foods are the linear
approximate, almost ideal demand system and the Rotterdam model (Alston and
Chalfant, 1993).” While these models became, in recent years, the most popular models
in estimating demand among agricultural economists because they are flexible enough
to help answer a variety of interesting questions (Alston and Chalfant, 1993; Eales and
Unnevehr, 1988, 1993; Huang, 1993; Tomek and Robinson, 2003), it is clear that, by
building on the underlying behavioral model of rational choice, they do not represent
the true consumer behavior. Moreover, neither of these models utilizes the reference
price from the perspective of the consumer. And while in some of these studies prices
are differenced in the empirical/statistical analysis (if price series are non-stationary),
this is done to convert these data into stationary time series which in turn guarantees
that the ordinary least squares estimators are unbiased, consistent, and efficient
(Hamilton, 1994; Enders, 1995). However, based on empirical evidence (Boztug and
Hildebrandt, 2006) failure to account for reference prices may also lead to incorrect
conclusions regarding consumer behavior.
Rationale for this very simple model/equation estimated in this paper follows the
prospect theory as well as the standard economic practice. The reference price in this
case is represented by the perceived price. Two alternatives of the perceived price
serving as the reference price were tested: the price paid last and the price paid on
average for the product. We chose to use the former for two reasons. First, the
(weighted) average approach is more suitable for time periods of less than one month.
Expecting consumers to recall prices from several months earlier is asking quite a lot.
Additionally, there does not appear to be a significant difference in estimation between
the two[4]. Following this rationale, we use an internal reference price as the difference
between the current time period price and the last time period price since the change in
price determines the choice rather than the price level itself (Tversky and Kahneman,
1992). Change in pork and turkey[5] prices have been included in the model to represent
 BFJ the external reference prices, i.e. those stimuli that are observed during the time of
112,1 purchase in the environment (Putler, 1992). Also change in income has been included to
assess its effect on the consumption of broilers. Finally, time has been included in the
model to determine if there has been any change in the overall consumption trend, i.e. if
broiler consumption has simply increased of decreased over time. The following
equation was estimated:
38
logðbroconÞt ¼ b1 þ b2 timet þ b3 dlogðbropÞt þ b4 dlogðturkpÞt
ð1Þ
þ b5 dlogðporkpÞt þ b6 dlogðincomeÞt þ 1t

where:
log – logarithmic transformation;
dlog – first differenced logarithmic transformation;
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

time – a time variable representing the number of months accrued during the
study, starting at zero;
brocon – broiler consumption;
brop – broiler retail price;
turkp – turkey retail price;
porkp – pork retail price;
income – per capita personal income; and
t – the time period.
Data for this study were obtained from several federal research agencies. The poultry
prices and per capita consumption numbers were obtained from the economic research
service (ERS) of the United States Department of Agriculture (USDA), through their
archived livestock and meat trade data in the Poultry Yearbook (www.ers.usda.gov/
data/meattrade/links.htm). The pork prices were found through the same site in the
USDA/ERS archived Red Meat Yearbook. Per capita income data were aggregated from
two sources. First, population data were obtained from the United States Department of
Labor: Bureau of Labor Statistics reports on the Civilian Non-Institutional Population
(www.bls.gov/ces). Then total US personal income data were obtained from the personal
income report of the United States Department of Commerce: Bureau of Economic
Analysis (www.bea.gov/bea/an/nipaguid.pdf). The total personal income data were
then divided by the total non-institutional population data to obtain per capita personal
income. All data obtained were reported monthly covering the period from 1980:1 to
2003:12 adding up to the total of 288 observations for each variable.

4. Results
The analysis was conducted in EViews software for econometric analysis. Each
explanatory variable was initially tested for unit root utilizing the augmented
Dickey-Fuller test. Interestingly, all three price variables have been I(0) at 5 per cent
significance level, while the income is I(1), i.e. it had to be differenced once in order to be
stationary. If this equation was to be estimated as the error correction model, all
 variables would have had to be differenced in order to be of the same order of integration Consumer
according to Granger representation theorem (Enders, 1995, p. 371). Each explanatory behavior in food
data set was then first differenced to eliminate the random walk issue and create a
stationary time series. Notice that once the data are differenced, traditional rational consumption
choice consumer behavioral model cannot be considered an underlying behavioral
model anymore since that theory implies that consumers consider the level values of the
price variables and not the change in prices when making their choice. More 39
importantly, it should not be the nature of the data generating process determining what
the appropriate underlying behavioral model is. Additionally, the data for all variables
(both dependent and explanatory) were logarithmically transformed to smoothen the
data series and to facilitate the interpretation of the results in the elasticities form.
Results from the regression analysis are reported in Table I.
The R 2 of 0.8839 suggests that the explanatory variables in the model do an
adequate job of explaining the variation of broiler consumption. Also, the adjusted R 2
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

value of 0.8819, nearly identical to the R 2, suggests that the model is indeed well
specified with no unnecessary variables included. The Durbin-Watson statistic of 2.05
indicates that the first differencing adequately handled any serial correlation issues
that may have been present in the model. The F-statistic is significant at the 99 per cent
level and indicates rejection of the null hypothesis that none of the variation in broiler
prices is explained by the right-hand side variables. Finally, results of the White test
indicate no presence of heteroskedasticity, while the results of the Jarque-Bera test
statistic suggest that we cannot reject the null hypothesis of normality.
By further examining the regression model, several things become apparent. It is
apparent that time, the price of pork and the price of turkey both have a positively signed
coefficient, while the price of broilers and per capita income both have negatively
signed coefficients. These coefficients are addressed further individually. Time has a
positive coefficient and is a statistically significant contributor to the variation in broiler
consumption; however, the coefficient is extremely small and suggests that while
per capita consumption may have increased over the course of this study that increase is
small and the effect of time, ceteris paribus, is minimal when compared to the other
explanatory variables. The first differenced variable representing broiler prices is
negatively signed, but is statistically insignificant at the standard levels of significance.

Dependent variable: log(brocon)

Variable Coefficient Std error t-statistic Probability

C 1.32 0.009 142.50 0.00

Time 7.28 £ 102 5 1.64 £ 102 6 44.38 0.00
dlog(brop) 20.24 0.19 21.23 0.21
dlog(porkp) 0.16 0.24 0.68 0.49
dlog(turkp) 0.52 0.12 4.44 0.00
dlog(income) 21.62 0.75 22.16 0.03
R2 0.883 Mean dependent variable 1.63
Adjusted R 2 0.881 SD dependent variable 0.19
SE of regression 0.068 Akaike info criterion 22.50
Sum squared residuals 1.31 Schwarz criterion 22.43
Log likelihood 366.12 F. statistic 428.00 Table I.
Durbin-Watson stat 2.05 Prob. (F-statistic) 0.00 Regression results
 BFJ The sign however follows with intuition developed from the literature on reference
112,1 prices. The negative coefficient suggests that when the change from previous period
price to current period price was negative, i.e. the price of broilers decreased relative to
the reference or the previous period price, consumption increased, and vice-versa for a
positive reference price. However, for all practical purposes, the statistical value of this
coefficient is not different from zero. Notice that this result is consistent with Eales and
40 Unnevehr (1988). The positive coefficients associated with pork prices indicates that
pork is indeed a substitute, although closer examination of the t-statistic indicates
that pork price is not an adequate indicator of changes in broiler consumption given that,
statistically speaking, this coefficient is also equal to zero. The coefficient of change in
turkey prices is positive and is significant at the 1 per cent level, indicating that turkey is
a good substitute for broilers. Using the language of reference price theory, an increase in
external reference price (turkey price in this case) will lead to an increase in broiler
consumption.
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

Perhaps, one of the more interesting results is the negative coefficient associated with
per capita income. This indicates that as per capita income increases, broiler
consumption decreases. Initially, this result seems like an economic anomaly.
Consumption of any (normal) good should increase with increasing income by
conventional intermediate microeconomic thinking. However, further review of the
relevant literature appears to explain these results. Eales and Unnevehr (1988) examine
demand of meat and poultry as aggregate and disaggregated products. They found that
whole broilers are inferior goods while chicken parts (boneless skinless breasts, wings,
drumsticks, etc.) are considered normal goods. This makes intuitive sense from the
standpoint that parts require less preparation, effort, and expertise although they are
more expensive. The results of this regression appear to support the findings of Eales
and Unnevehr as the increase in income shows consumption leading away from whole
birds and (presumably) towards the consumption of parts.

5. Conclusions and implications

The results of this study seem to land limited support to the theory of reference prices
or more generally reference points, as they affect consumption. Broiler consumption
was shown not to change (in the sense of statistical significance) as their price change
(internal reference price). However, consumption of broilers was also shown to be
affected by the external reference price of turkey. Finally, support was given to the
findings (Eales and Unnevehr, 1988) that have suggested that whole chicken is an
inferior good, as increasing income had a negative effect on broiler consumption.
The apparent support is clouded by the observed similarities of this model based on
reference prices to those based on rational choice. These findings bring the question of
which theory is valid, and under what circumstances might that validity change. The
importance of accounting for reference prices appears to be validated, but the fact that
both theories can yield the same estimations does little to secure either theory as right
or wrong.
The model was specified using the underlying theory of reference prices and utilizing
literature and theories that support reference prices and indicate the failure of
assumptions and axioms surrounding the theory of rational choice. It is very interesting
to note that the final model bears a striking resemblance to the first differenced linear
approximations seen in the literature of estimating demand for meat and poultry
 (Eales and Unnevehr, 1988, 1993). The models developed in the almost ideal demand Consumer
system and the inverse almost ideal demand system are based on the theory of rational behavior in food
choice and, according to the authors, satisfy the axioms of choice exactly. It seems that
constraints of econometrics estimations including the correction of serial correlation or consumption
elimination of unit roots have facilitated the construction of very similar econometric
models to estimate consumption (demand) although the underlying theories of these
models are fundamentally opposed to each other. This seems to suggest that 41
econometric estimations indicating causality or correlation may be assumed to support a
theory when that theory may have no relevance to the model. This leaves much
ambiguity as to the “truth” or authenticity of the underlying theory. The surveys from
the literature (Kahneman and Tversky, 1979; Miljkovic, 2005) have demonstrated the
failure of perfect rationality and the importance of gains, losses, and deviations from
the reference point. It is possible that those practicing economics based on rational
choice theory have inadvertently been accounting for reference prices by first
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

differencing the explanatory price variables in their demand estimations. This claim is
nothing more than a possibility and further research beyond the scope of this paper is
necessary to support or refute this possibility. The similarities do seem to indicate that
the econometric estimation methods themselves are valid, if only because of the
modeling support from both sides of the rational choice aisle. The questions raised by
Miljkovic (2005), however, still stand: When is rational choice useful for approximating
behavior, and when should perfect rationality be abandoned for another theory? Further
research is necessary to provide deeper insight and understanding to these questions.

Notes
1. For a more in-depth review and proof of these axioms, the reader is directed to Miljkovic
(2005).
2. This characteristic of the prospect theory will be utilized later in the empirical analysis
portion of the paper.
3. External reference prices are those stimuli that are observed during the time of purchase in
the environment. Examples include recommended retail price, sale prices displaying the old
price, or prices of other products present in the purchase environment. It was determined
that consumers do indeed act as if the price of an individual product is compared to multiple
reference prices (Boztug and Hildebrandt, 2006).
4. In the interest of completeness, we did run two estimations that used a moving average
model of internal reference price, a three month moving average and a six month moving
average. In both models, the results for both external reference prices (e.g. pork and turkey)
were similar to a single period model. However, the coefficients for internal reference price in
each model was statistically insignificant. With this in mind, the single period model seemed
to be the most appropriate.
5. Turkey is another poultry/white meat while pork has been marketed in recent years as
another white meat. Beef is omitted from the analysis considering it is red meat.

References
Allais, M. (1979), “The foundations of a positive theory of choice involving risk and a criticism of
the postulates and axioms of the American school”, in Allais, M. and Hagen, O. (Eds),
Expected Utility Hypotheses and the Allais Paradox, Reidel, Dordrecht.
 BFJ Alston, J.M. and Chalfant, A. (1993), “The silence of the lambdas: a test of the almost ideal and
Rotterdam models”, American Journal of Agricultural Economics, Vol. 75 No. 2, pp. 304-13.
112,1
Arrow, K. (1982), “Risk perception in psychology and economics”, Economic Inquiry, Vol. 20
No. 1, pp. 1-9.
Boztug, Y. and Hildebrandt, L. (2006), “An empirical test of theories of price valuation using a
semi-parametric approach, reference prices, and accounting for heterogeneity”, working
42 paper, Institute of Marketing, Humboldt University of Berlin, Berlin.
Briesch, R.A., Krishnamurthi, L., Mazumdar, T. and Raj, S.P. (1997), “A comparative analysis of
reference price models”, Journal of Consumer Research, Vol. 24 No. 2, pp. 202-14.
Camerer, C.F. (1992), “Recent tests of generalizations of expected utility theory”, in Edwards, W.
(Ed.), Utility: Theories, Measurement, and Applications, Kluwer Academic, Boston, MA.
Chew, S.H. (1983), “A generalization of the quasilinear mean with applications to the
measurement of income inequality and decision theory resolving the Allais paradox”,
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

Econometrica, Vol. 51 No. 5, pp. 1065-92.

Deaton, A. and Muellbayer, J. (1980), “An almost ideal demand system”, The American Economic
Review, Vol. 70 No. 3, pp. 312-26.
Eales, J.S. and Unnevehr, J. (1988), “Demand for beef and chicken products: separability and
structural change”, American Journal of Agricultural Economics, Vol. 70 No. 3, pp. 521-32.
Eales, J.S. and Unnevehr, J. (1993), “Simultaneity and structural change in US meat demand”,
American Journal of Agricultural Economics, Vol. 75 No. 2, pp. 259-68.
Enders, W. (1995), Applied Econometric Time Series, Wiley, New York, NY.
Fishburn, P.C. (1983), “Transitive measurable utility”, Journal of Economic Theory, Vol. 31 No. 2,
pp. 293-317.
Fishburn, P.C. (1984), “SSB utility theory and decision making under uncertainty”, Mathematical
Social Sciences, Vol. 8 No. 2, pp. 253-85.
Fishburn, P.C. (1988), Nonlinear Preference and Utility Theory, Johns Hopkins University Press,
Baltimore, MD.
Hamilton, J.D. (1994), Time Series Analysis, Princeton University Press, Princeton, NJ.
Huang, K.S. (1993), “A complete system of US demand for food”, ERS, Technical Bulletin
No. 1821, USDA, Washington, DC, pp. 70.
Kahneman, D. and Tversky, A. (1979), “Prospect theory: an analysis of decision under risk”,
Econometrica, Vol. 47 No. 2, pp. 263-91.
Kalyanaram, G. and Little, J.D.C. (1994), “An empirical analysis of latitude of price acceptance in
consumer package goods”, Journal of Consumer Research, Vol. 21, pp. 408-18.
Kreps, D.M. (1990), A Course in Microeconomic Theory, Princeton University Press, Princeton, NJ.
Lichtenstein, D.R. and Bearden, W.O. (1989), “Contextual influences on perceptions of
merchant-supplied reference prices”, Journal of Consumer Research, Vol. 16, pp. 55-66.
Lilien, G.L., Kotler, P. and Moorthy, K.S. (1992), Marketing Models, Prentice-Hall, Englewood
Cliffs, NJ.
Loomis, G. and Sugden, R. (1982), “Regret theory: an alternative theory of rational choice under
uncertainty”, Economic Journal, Vol. 92 No. 3, pp. 805-24.
Luce, R.D. and Narens, L. (1985), “Classification of concatenation measurement structures
according to scale type”, Journal of Mathematical Psychology, Vol. 29 No. 1, pp. 1-72.
Machina, N.J. (1982), “Expected utility analysis without the independence axiom”, Econometrica,
Vol. 50 No. 2, pp. 277-323.
 Mas-Colell, A., Whinston, M.D. and Green, J.R. (1995), Microeconomic Theory, Oxford University Consumer
Press, New York, NY.
Miljkovic, D. (2005), “Rational choice and irrational individuals or simply an irrational theory: a
behavior in food
critical review of the hypothesis of perfect rationality”, The Journal of Socio-Economics, consumption
Vol. 34, pp. 621-34.
Miljkovic, D. and Mostad, D. (2005), “Impact of changes in dietary preferences on US retail
demand for beef: health concerns and the role of media”, Journal of Agribusiness, Vol. 23 43
No. 2, pp. 183-98.
Monroe, K.B. (1971), “‘Psychophysics of prices’: a reappraisal”, Journal of Marketing Research,
Vol. 8, pp. 248-51.
Putler, D.S. (1992), “Incorporating reference price effects into a theory of consumer choice”,
Marketing Science, Vol. 11 No. 3, pp. 287-309.
Quiggin, J. (1982), “A theory of anticipated utility”, Journal of Economic Behavior &
Organization, Vol. 3 No. 2, pp. 323-43.
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)

Sherif, M. and Hovland, C.I. (1961), Social Judgment, Yale University Press, New Haven, CT.
Slovic, P. and Lichtenstein, S. (1983), “Preference reversals: a broader perspective”, The
American Economic Review, Vol. 73 No. 4, pp. 596-605.
Tomek, W.G. and Robinson, K.L. (2003), Agricultural Product Prices, Cornell University Press,
Ithaca, NY.
Tversky, A. (1969), “Intransitivity of preferences”, Psychological Review, Vol. 76 No. 1, pp. 31-48.
Tversky, A. and Kahneman, D. (1981), “The framing of decisions and the psychology of choice”,
Science, Vol. 211, pp. 453-8.
Tversky, A. and Kahneman, D. (1992), “Advances in prospect theory: cumulative representation
of uncertainty”, Journal of Risk and Uncertainty, Vol. 5, pp. 297-323.
Tversky, A., Slovic, P. and Kahneman, D. (1990), “The causes of preference reversal”, The
American Economic Review, Vol. 80 No. 1, pp. 204-17.
Urbany, J.E., Bearden, W.O. and Weilbaker, D.C. (1988), “The effect of plausible and exaggerated
reference prices on consumer perceptions and price research”, Journal of Consumer
Research, Vol. 15, pp. 95-110.
von Neumann, J. and Morgenstern, O. (1944), Theory of Games and Economic Behavior, Princeton
University Press, Princeton, NJ.
Watson, W.A. (1957), “Contrast, assimilation, and the effect of central tendency”, American
Journal of Psychology, Vol. 70 No. 4, pp. 560-8.
Winer, R.S. (1986), “A reference price model of brand choice for frequently purchased products”,
Journal of Consumer Research, Vol. 13 No. 2, pp. 250-6.
Winer, R.S. (1988), “Behavioral perspective on pricing: buyers’ subjective perceptions of price
revisited”, in Devinney, T.M. (Ed.), Issues in Pricing: Theory and Research, Lexington
Books, Lexington, MA, Chapter 2.
Wricke, M., Herrmann, A. and Huber, F. (2000), “Behavioral pricing”, WiSt, Vol. 12, pp. 692-7.

Corresponding author
Dragan Miljkovic can be contacted at: Dragan.Miljkovic@ndsu.edu

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints
 This article has been cited by:

1. Andreas Lemmerer, Klaus Menrad. 2015. Customers’ use of prices and internal reference prices to evaluate
new food products. British Food Journal 117:4, 1411-1424. [Abstract] [Full Text] [PDF]
2. Iddrisu Yahaya, Fred A. Yamoah, Faizal Adams. 2015. Consumer motivation and willingness to pay for
“safer” vegetables in Ghana. British Food Journal 117:3, 1043-1065. [Abstract] [Full Text] [PDF]
3. Paul T.M. Ingenbleek. 2015. Price strategies for sustainable food products. British Food Journal 117:2,
915-928. [Abstract] [Full Text] [PDF]
4. Eleftherios Alamanos, Michael Bourlakis, Irini Tzimitra‐Kalogianni. 2013. Segmenting Greek tomato
consumers: policy and marketing insights towards a healthy diet. British Food Journal 115:4, 488-507.
[Abstract] [Full Text] [PDF]
Downloaded by Duquesne University At 15:46 30 January 2016 (PT)