Moderators of the Denomination Effect: Role of Hedonic Versus Utilitarian

ASSOCIATION FOR CONSUMER RESEARCH

Labovitz School of Business & Economics, University of Minnesota Duluth, 11 E. Superior Street, Suite 210, Duluth, MN 55802

Moderators of the Denomination Effect: Role of Hedonic Versus Utilitarian Consumption and Denomination Matching Joydeep Srivastava, Temple University, USA Yuqian Chang, Temple University, USA

The denomination effect suggests that individuals are less likely to spend when money is in the form of a single large denomination (e.g., a $10 bill) relative to many smaller denominations (e.g., ten $1 bills). This research examines whether hedonic versus utilitarian considerations and denomination matching moderate the denomination effect.

[to cite]: Joydeep Srivastava and Yuqian Chang (2018) ,"Moderators of the Denomination Effect: Role of Hedonic Versus Utilitarian Consumption and Denomination Matching", in E - European Advances in Consumer Research Volume 11, eds. Maggie Geuens, Mario Pandelaere, and Michel Tuan Pham, Iris Vermeir, Duluth, MN : Association for Consumer Research, Pages: 24-28.

[url]: http://www.acrwebsite.org/volumes/1700119/volumes/v11e/E-11

[copyright notice]: This work is copyrighted by The Association for Consumer Research. For permission to copy or use this work in whole or in part, please contact the Copyright Clearance Center at http://www.copyright.com/. Money in Context Theodore J. Noseworthy, Schulich School, York University, Canada

Paper #1: How Slider Scales Systematically Bias Willingness-to- contexts. In experiment 1a, participants were shown three products in Pay: Implicit Recalibration of Monetary Magnitudes an ascending bid format where bids were made that were higher than Manoj Thomas, Cornell University, USA the starting point (e.g. e-Bay) and asked to indicate their willingness- Ellie Kyung, Dartmouth College, USA to-pay for the products through a slider scale or text box. The slider scale ($281) elicited higher bids relative to textbox format ($273, Paper #2: Denomination Anchors: Demonstrating the main effect of response format, F(1, 188) = 29.11, p < .01.).Experi- Contingent Nature of the Denomination Effect as a Function of ment 1b examined descending bids (e.g. Priceline) where the bids Price Level were made that were lower than the starting point—they were asked Elena Reutskaja, IESE Business School, Spain to indicate their bids for six items using a textbox or using a slider Jeremiah Iyamabo, IESE Business School, Spain with an anchor on either the right or left side of the scale. Partici- Iñigo Gallo, IESE Business School, Spain pants’ average bids in both the left-to-right-slider condition ($133.24 Priya Raghubir, NYU-Stern Business School, USA vs. $143.49; F(1, 298) = 48.65, p < .01) and right-to-left-slider con- Paper #3: Moderators of the Denomination Effect: Role of dition ($137.74 vs. $143.49; F(1, 298) = 15.52, p < .01) were lower Hedonic versus Utilitarian Consumption and Denomination than bids in the textbox condition. In experiment 1c, same effect Matching holds even in a real bidding context where participants were given Joydeep Srivastava, Temple University, USA the opportunity to bid on a Japanese thermal mug and were all given Yuqian Chang, Temple University, USA the retail price of the item ($24) and explicitly given the same range Paper #4: Malleable Monopoly Money: Does How You Pay for a of possible bids—those using slider scales bid higher ($18.80) than Gift Card affect How You Spend it? those using a textbox ($16.02, F(1, 141) = 6.54, p = .01). Priya Raghubir, New York University, USA We offer an explanation for this effect based on the numerical Shelle Santana, Harvard Business School, USA cognition literature in cognitive psychology (Dehaene 2001, 2003; Dehaene and Changeux 1993; Parducci 1965, 1995) and consumer How Slider Scales Systematically Bias Willingness-to- psychology (Adaval 2013; Bagchi and Davis 2016; Cheng and Mon- Pay: Implicit Recalibration of Monetary Magnitudes roe 2013; Grewal and Marmorstein 1994; Lembregts and Pandelaere 2013; Monroe 1973; Thomas and Morwitz 2009). Building on this EXTENDED ABSTRACT work, we propose that the effect of response formats on valuations is Although organizations use text boxes and slider scales inter- caused by a change in the boundaries of mental categories—such as changeably to elicit consumers’ willingness-to-pay, nine experiments low, medium, and high—that people use to judge magnitudes. When demonstrate that slider scales elicit more extreme responses than text people use a textbox to submit their bids, the category boundaries boxes. This happens because slider scales alter the calibration of the are assimilated towards the starting bid on the mental number line. mental number line that people use to evaluate their bids. With a textbox, only the starting point is salient. In contrast, when Today many organizations allow customers to decide how much people use a slider scale to submit their bid, the category boundar- to pay for a product or a service on technology interfaces. Online ies are influenced by both end-points of the scale, causing people to retailers such as eBay allow customers to bid on the items. Priceline recalibrate their mental number line. Therefore, the boundaries of allows customers to name their own prices for hotels rooms. Charita- the mental categories used to judge magnitudes can be quite differ- ble organizations, such as Doctors Without Borders, allow donors to ent depending on whether the responses are elicited using textbox or enter a donation amount of their choice. In many cases, the response slider scale. format is an open-ended textbox where people have to come up with We demonstrate this underlying process in several ways. (For a price in their mind and enter it. However, with the proliferation the sake of brevity, the remaining results are summarized in the table of mobile transactions, some organizations have started using slider below.) First, we show that the range salience effect is stronger for scales instead of textboxes due to their perceived ease of use. This extreme categories that a farther away from the starting point in both has led to a proliferation of their use in mobile interfaces, web sites, bidding and non-bidding contexts. In experiment 2a, participants and even by academic researchers. were asked to submit what they considered low, medium, and high Interchangeable use of textboxes and slider scales is based on bids for a product using either a textbox, slider scale, or select a bid the assumption that response formats do not change people’s re- amount from a horizontal list of bid amounts. In experiment 2b, par- sponses because their valuations should be stable. While several ticipants were asked to submit low, medium, and high taxi fares + studies suggest that this assumption might not be valid (Champ and tip using either a textbox or slider scale. In both studies, the effect Bishop 2006; Klien, Thomas, and Sutter 2007), somewhat surpris- of response format increased as distance from the starting point in- ingly, none of the extant studies have examined whether valuations creased, and the effect of selecting a bid amount from a horizontal list and bids elicited using a textbox would be any different from those was the same as using a slider scale, providing further evidence that elicited through a slider scale. This research focuses on the follow- visualization of a number line is important for the effect. Second, we ing questions: Do consumers respond differently in systematic ways show that reducing the response range attenuates the range salience when presented with textbox versus slider scale response formats? effect both by explicitly reducing the size of the range (experiment If so, then what is the psychological mechanism underlying this 3a, giving a small, medium, or large range of possible responses) systematic difference? Is there a difference for ascending versus de- and reducing attention to the upper end of the range through mode scending bids? of payment (experiment 3b, telling people they are paying in cash v. Across nine experiments, we show that relative to a textbox, credit). Finally, we show that the visual salience of the range moder- a slider scale elicits more extreme responses in willingness-to-pay ates the range salience effect—merely including a text box with a

European Association for Consumer Research 24 Volume 11, © 2018 Asia-Pacific Conference of the Association for Consumer Research (Volume 12)/ 25 slider scale draws attention away from the range, causing the effect 19% did (z=8.07, p<.001), supporting the proposed Denomination to persist (experiment 4a) and the effect is exacerbated on mobile Anchor effect. versus web interfaces where the range length appears smaller and Study 2 (n=750 panelists from Prolific Academic, a European less extreme (experiment 4b). Together, the results of this research online panel, Male=65%, M=29 years), used a 2 (Price match: higher demonstrate a robust new effect in the highly managerially relevant or lower denomination) × 5 (amount: €2 {€1 coin+5X€0.20], €4 {€2 domain of response format while offering new insights in theory de- coin+4X€0.50], €40 [€20 bill+f4X€5], €200 [€100 bill+5X€20], velopment. €1000 [€100 bill+5X€20]) design. The price match set varied as a function of whether it was a high or a low price match depending on Denomination Anchors: the amount -- for €2: Trident (€1) or Wrigley (€0.25c); for €4: breath Demonstrating the Contingent Nature of the mints (€2), or candy (€0.50c); for €40: duvet cover (€20) or six coat Denomination Effect as a Function of Price Level hangers (€5); for €200: a jacket (€100), or headphones (€20), for €1000: TV (€500) or camera (€100). EXTENDED ABSTRACT In the lower priced €2 and €4 conditions, participants were Five studies show that at lower price/spend levels, the denom- more likely to pay using their smaller denominations: €0.20¢ or ination effect replicates, but at higher price/spending levels it can €0.50¢ versus €1 or €2 coins respectively (68%, 97%, 65%, 97%, reverse. This pattern suggests that the denomination effect may be c2s(1)>6.5, ps<.01). However, in the higher priced conditions the driven by anchoring on price and matching it with the available de- evidence was consistent with denomination anchors. When prices nominations in one’s wallet: the Denomination Anchor effect. matched the lower denomination participants were more likely to The denomination effect has documented that people are more pay using the lower denomination (92%, 91% and 76%, c2s(1)>18.5, likely to purchase when they carry smaller (vs. larger) denomina- ps<.001), but when prices matched the larger denomination they tions. It has been explained using perceptual fluency (Mishra, Mishra were less likely to (24%, 12%, 11% for ¬5, ¬20 or ¬100 respec- and Nayakankuppam 2006), self-control (Raghubir and Srivastava tively, c2s(1)>19.25, ps<.001). 2009), disgust (Di Muro and Noseworthy 2013), and memory (Ra- In Study 3 (n= 550 mTurkers, Male=56%, M=36 years) we used ghubir, Capizzani, and Srivastava 2017). We examine the denomina- a 2 (Price match: the larger denomination versus not) × 2 (amount: tion effect using choice of denomination to pay. $100 [$50+50x$1] versus $200 [$100+100x$1]) design. In the $100 We propose and demonstrate that at lower price/spend levels, conditions, the higher and lower price-match products were perfume people choose to pay in lower denominations, replicating the denom- ($50) and shampoo ($10). In the “$200” conditions, they were a cam- ination effect conceptually, but at higher price and spending levels, era ($100) and shampoo ($10). In the shampoo conditions, partici- people choose to pay with the denomination that matches the price pants were more likely to use their smaller $1 denominations (85%, of the product. This leads to a reversal for higher priced items. To- 93%, c2s(1)>81.0, ps<.001). In the perfume and camera conditions, gether, this pattern suggests that the denomination effect may addi- they were less likely to (29% and 32% for $50 and $100 respectively, tionally be driven by anchoring on the price of items to be purchased c2s(1)>13.0, ps<.001). and matching them with the available denominations in one’s wallet: Study 4 (n=215 MBA students from a European business the proposed Denomination Anchor effect. school, Male=74%, M=30 years) examines whether this effect holds Studies 1-3 establish the effect. Study 4 demonstrates its ro- for precise prices. Participants were given €100 as €50 bill+5x€10, bustness to precise prices (e.g., .99¢ endings). Study 5 establishes and encountered products that matched the higher or lower de- boundary conditions when the price of the product to be purchased nomination: perfume (€50 or €49.99) or shampoo (€10 or €9.99). ranges between 70%-100% of the value of the highest denomination Replicating earlier results, participants used €10 for shampoo (93% held. The studies use US and European participants, prices are in $ and 92% for €10 and €9.99 respectively, c2s(1)>33.0, ps<.001), or €, both MBA students, and online panelists. In all studies partici- but not perfume (26% and 13% for ¬50 and ¬49.99 respectively, pants were given a vignette with a certain amount to spend and the c2s(1)>12.50, ps<.001). denominations in which they carried their money and a product that In Study 5 (n=881 mTurkers, Male=49%, M=37 years) partici- they had to purchase with these factors systematically varied across pants encountered either a camera ($200: $100+5x$20) or perfume studies. The product options presented varied as a function of the ($100: $50+5x$10) at prices 100%-70% of the higher denomination amount of money they were asked to imagine they had, and whether (Camera: $100-$90-$80-$70; Perfume: $50-$45-$40-$35). Partici- it matched the value of the lower or higher denomination that they pants were less likely to purchase a camera with $20 when the prices carried. Their choice of denomination to pay was analyzed. All stud- were 80%-100% of $100 (30%, 17%, 40% for $100, $90 and $80, ies used random assignments to between-subjects conditions. c2s(1)>4.70, p<.05), but not at $70 (44%, p>.05). Participants were Study 1 (n=661 mTurkers, Male=53%, M=36 years) used a 2 less likely to purchase perfumes with $10 when the price was $50 (Price match: higher or lower denomination carried) × 3 (amount: or $45 (12% and 13%, c2s(1)>61.0, p<.001), but not at lower prices $2: $1 coin+4x0.25¢, $2: $1 bill+4x0.25¢, and $100: $50+5x$10) (45% and 49%, p>.05). design. In the $2 conditions, the product was either Trident $1 (high- To summarize, five studies show that at lower price/spend lev- er denomination price match), or Wrigley’s 0.25¢ (lower denomina- els, the denomination effect replicates using choice of denomination tion price match). Analogously, in the $100 condition, the options as the dependent variable, but at higher price/spending levels it can were perfume $50, or shampoo $10. In all four $2 conditions, par- reverse. Participants choose smaller denominations to make smaller ticipants were more likely to use their 0.25¢s (71%, 96%, 70% and purchases, but for larger purchases they choose the denomination 96%, c2s(1)>16.0, ps<.001). This replicates the denomination effect that matches the product price. This pattern suggests that the denom- using the measure of choice between denominations (Raghubir and ination effect may be driven by anchoring on price and matching Srivastava 2009). On the other hand, in the $100 conditions, par- it with available denominations. This research adds to the literature ticipants preferred to pay with the denomination that matched the on anchoring on price information (Morwitz, Greenleaf and Johnson price: for $10, 88% chose $10 (z=9.899, p<.001), but at $50, only 1998, Thomas & Morwitz 2005). 26 / Money in Context Moderators of the Denomination Effect: denomination (e.g., $8 price tag when one has one $10 bill versus Role of Hedonic versus Utilitarian Consumption and two $5 bills) there is less of a need to monitor and track spending Denomination Matching when the purchase is to be made. In contrast, if the price matches the small denomination (e.g., $4 price tag when one has one $10 bill EXTENDED ABSTRACT versus two $5 bills), the denomination effect is likely to be accentu- The denomination effect suggests that individuals are less likely ated since the large denomination acts as a mechanism for precom- to spend when money is in the form of a single large denomination mitment to exert self-control. (e.g., a $10 bill) relative to many smaller denominations (e.g., ten Study 4 was designed to test this prediction. Consistent with our $1 bills). This research examines whether hedonic versus utilitarian conceptualization, the results showed that while there was no differ- considerations and denomination matching moderate the denomina- ence in the likelihood to spend as a function of denomination (one tion effect. $20 vs. four $5), when the price was $18. However, when the price Previous research has documented the denomination effect was $4, people were more willing to spend when they had four $5 (Mishra, Mishra, and Nayakankuppam 2006; Raghubir and Srivas- bills than when they had one $20 bill. tava 2009) wherein individuals are less willing to spend a specific Overall, the results of the studies along with the conceptualiza- amount of money when it is represented by a single large denomination is consistent with the idea that people use denomination as a way tion to control and regulate their spending. As such, factors that enhance (e.g., a $10 bill) relative to multiple smaller denominations the need for self-control such as when individuals consider a hedonic (e.g., ten $1 bills). Raghubir and Srivastava (2009) suggest that the consumption, the denomination effect is accentuated whereas when denomination effect occurs because large denominations are psycho- there is less of a need to exercise self-control, the denomination ef- logically less fungible and individuals use large denominations as a fect is attenuated. Further, factors that increase the need to monitor way to control and regulate spending. and track one’s spending, larger denominations may be used as a The current research examines two factors that may moderate precommitment mechanism to preempt such self-control failures. the denomination effect. First, this research argues that hedonic versus utilitarian considerations may moderate the denomination effect. Malleable Monopoly Money: Does How You Pay for a According to Hirschman and Holbrook (1982), hedonic consump- Gift Card affect How You Spend it? tion “relate to the multi-sensory, fantasy, and emotive aspects of one’s experience with products.” Hedonic products are thus desired EXTENDED ABSTRACT for pleasure, excitement, fantasy, and fun. In contrast, utilitarian Four studies show that ‘monopoly money’ is a relative construct consumption, relating to functional and instrumental benefits, tend and the subjective value of a gift card is influenced by the currency to fulfill basic needs (Khan, Dhar, and Wertenbroch 2004). Since it was converted from. Gift cards purchased with cash are perceived hedonic (vs. utilitarian) consumption is more discretionary, it sym- to be more valuable and easier to spend than those purchased with bolizes waste, indulgence, guilt, and thus the need to control. As points/miles. such, given that a large denomination is used to control and regu- In 2015, over 73% of consumers purchased at least one gift late spending, such control is more likely to be exercised when the card, and U.S. gift card spending is projected to reach nearly $160B spending is for something hedonic versus utilitarian. Said differently, by 2018. Yet we know very little about the psychology of this popu- the denomination effect is more likely to be manifested for a hedonic lar form of spending. Most prior research on the subjective value of consumption whereas the effect is likely to be attenuated for a utili- money has compared cash versus credit cards (Feinberg 1986, Gour- tarian consumption. ville and Soman 1998, Hirschman 1979, Prelec and Loewenstein Study 1 showed that when faced with a hedonic purchase, peo- 1998, Raghubir and Srivastava 2008, Soman 2001, Shah et al. 2016, ple were less likely to spend when they had a one $10 bill than ten $1 Srivastava and Raghubir 2002) or local and foreign currencies (Ra- bills. In contrast, the likelihood to spend did not vary across the large ghubir and Srivastava 2002, Raghubir, Morwitz, and Santana 2012). and small denominations when faced with a utilitarian purchase. Gift cards are interesting because consumers can buy them using a In a within-subjects design, study 2 found that when people had range of currencies, and all currencies are not equally fungible (Pr- one $20 bill and four $5 bills to buy two items from 2 hedonic and 2 elec and Loewenstein 1998). We examine how the currency used to utilitarian products (all valued at $20), hedonic products were more pay for a gift card influences the subjective value of the resulting likely to be paid with small denominations than utilitarian products. gift card, with carry through effects to spending. Normatively speak- Study 3 proposes to examine, in the context of choosing de- ing, a gift card should have the same value regardless of how it was nomination of cash at the ATM, whether people choose a single large purchased. But the results across four studies suggest that it is not. denomination or several small denominations when considering a Study 1 examines how 26 currencies are subjectively valued. hedonic versus utilitarian product. 100 U.S. mTurkers (64% male, M = 32.96 years) answered to what The second factor that this research considers is denomination extent a range of 26 currencies were like money (0 = Not at all like matching or the extent to which the price matches the denomina- money/ legal tender to 100 = the same as money/ legal tender). Par- tion of money. Raghubir and Srivastava’s (2009) explanation that ticipants perceived cash to be most similar to money (M = 91.68) and individuals use denominations strategically as a way to control their airline miles to be least (M = 36.46, F(25, 1925) = 48.67, p < .0001). spending is based on the assumption that a large denomination is Perceptions of gift cards purchased with cash, gift cards purchased easier to manage since it facilitates better monitoring and tracking with reward points, plastic gift cards, and email gift cards diverged of behavior (spending) than an equivalent amount in many smaller (F(3, 285) = 5.50, p = .001), with gift cards purchased with cash (M denominations. Raghubir, Capizzani, and Srivastava (2017) further = 65.15) perceived to be more like money than those purchased with show that individuals’ monitoring and tracking capabilities are influ- reward points (M = 57.64, t = 3.44, p < .05). enced by the denomination of money. Based on prior research, we To examine whether the subjective value of a converted cur- argue that the denomination effect occurs in conditions where fail- rency reflects the combined subjective values of the former and new ures in self-control are more likely. When the price matches the large currencies, we conducted a regression with the subjective value of a Asia-Pacific Conference of the Association for Consumer Research (Volume 12)/ 27 gift card purchased with reward points as the dependent variable and Champ, Patricia A., and Richard C. Bishop (2006), “Is willingness the subjective value of an email gift card and the subjective value of to pay for a public good sensitive to the elicitation format?,” reward points as predictors. The regression was significant (F(2, 96) Land Economics, 82(2), 162-173. = 100.41, p < .001, Ra2 = .67), with both coefficients significant (bs Cheng, Lillian L., and Kent B. Monroe (2013), “An appraisal = .54 and .36 for email gift card and reward points respectively, ts = of behavioral price research (part 1): price as a physical 7.23 and 4.79, ps < .001). Similarly, a regression with the subjective stimulus,” AMS Review, 3(3), 103-129. value of a gift card purchased with cash as the dependent variable Dehaene, Stanislas (2001), “Précis of the number sense,” Mind & and the subjective value of an email gift card and cash was signifi- Language, 16 (1), 16-36. cant (F(2, 94) = 76.39, p < .001, Ra2 = .61, bs = .74 and .15 for email Dehaene, Stanislas (2003), “The neural basis of the Weber–Fechner gift card and cash respectively, ts = 11.41 and 2.35, ps < .05). law: a logarithmic mental number line,” Trends in cognitive Studies 2-4 focus on a gift card that has been purchased using a sciences, 7(4), 145-147. form of money that is more like money than a gift card (i.e., cash), or Dehaene, Stanislas, and Jean-Pierre Changeux (1993), one that is less like money (e.g., miles or points). In Study 2, 1,054 “Development of elementary numerical abilities: A neuronal mTurkers (53.7% male, M = 34.18 years) were asked to imagine model,” Journal of cognitive neuroscience, 5(4), 390-407. they had to buy 5 different gift cards using $250 in which was in one Grewal, Dhruv, and Howard Marmorstein (1994), “Market price of six forms: reward points, airline miles, cash, a PayPal account, variation, perceived price variation, and consumers’ price a Visa gift card, and a credit card. A one-way six-level ANOVA on search decisions for durable goods,” Journal of Consumer judgments of 12 $25 gift cards, revealed that they are perceived to Research, 21(3), 453-460. be differentially valuable (F(5, 1048) = 4.12, p < .001), and have Klein, Jonathan D., Randall K. Thomas, and Erika J. Sutter (2007), differential purchase intentions depending on the form of payment “Self-reported smoking in online surveys: prevalence estimate (F(5, 1048) = 2.50, p < .05). 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