Price perceptions, merchant incentives, and consumer welfare

The purpose of this paper is to review the research demonstrating the consumer's erroneous and unfounded perceptions of prices, which can have severe negative consequences on consumer welfare.

This is a review paper of previous research on the price/quality relationship and the effects of advertised reference price on consumer's price acceptance.

The major findings are that you do not necessarily get what you pay for and your idea of what an item should cost is influenced by advertised prices even when they are totally unbelievable.

The value of this paper is in sensitizing the reader to the ways in which sellers, perhaps unconsciously, can take advantage of consumers' price misperceptions.