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Trigeorgis (1993) proposed several broad implications of real options that can be applied to many dynamic trading environments (such as online auctions). The key idea is that buyers in a trading environment are generally affected by a set of dynamic factors usually outside of their control. For instance, there are certain techniques that online sellers can do to entice buyers (bidders) to go further into the bidding process. As a result, seller provided cues, such as product price, quality and other attributes, are frequently the key information for consumers to formulate their internal assessment of the product. The intertwined relationship among all these seller factors eventually affects a consumer’s buying behavior (Rajneesh et al., 2003).
In the pricing strategy literature, several forms of product price (e.g., actual sale price, reference price provided by seller and other price criteria) have long received research attention. For example, Della Bitta, Monroe and McGinnis (1981) found that seller’s price provided an anchor point for consumers to formulate their own internal assessment of the product value. The assumption for this relationship to hold is that no other price references are available or economically accessible. However, such internal assessment of product value through product price does not always remain constant in online auctions as consumers continue to be exposed to bids from which an individual’s assessment of product value continues to be shaped by the changing bidding price. As a result, the influence of seller’s set price may not be the same compared to the price in a static environment (e.g., shopping at brick-and-mortar locations).
Quality of certain products (i.e., those that require user experience and/or interaction) sold through online auctions may be difficult to assess for their quality until they are received. For example, the empathy, reliability and tangibility dimensions of SERVQUAL that have been shown to have an effect on customer satisfaction (e.g., Chang, et al., 2013) are not easy to measure until the product is received. Some studies suggest that seller provided price may be considered as an indicator of product quality when there is no other means to gauge product quality or when it is difficult or very costly to obtain such quality information (Jacoby, Olson & Haddock, 1971; Raju, 1977; Wheatley & Chiu, 1977; Papaioannou, Assimakopoulos, Sarmaniotis & Georgiadis, 2013). Although sellers may have their own ways to affect price in online auctions, other buyers can also exercise their influence on the final price by bidding. This price competition through bidding gradually shapes the true perceived product price among the bidders.
This price discussed in the preceding paragraphs is set externally outside of consumers (a.k.a., articulated price), but most consumers formulate their own price perception as “internal reference price” – a term defined by Thomas and Menon (2007) as “… the price point on the subjective judgment scale above which all prices are typically judged as high and below which they are judged as low” (p. 401). Although abundant studies (e.g., Saini, Rao & Monga, 2010, Dutta, 2012) have focused on consumers’ internal reference price as an important driver for purchase intention, few have shed lights on the dynamics of online auction, perceived price gap between referenced price and seller’s price, and vendor quality for their joint effect on consumer utility.
Therefore, this study is designed to (1) apply the concept of real options theory to evaluate how independent variables affect the buyers’ perceived utility and perceived product quality, and (2) examine vendor as well as product quality perceptions on the perceived level of utility.