The effect of explicit reference points on consumer choice and online bidding behavior

Sellers often explicitly suggest to buyers that they compare one option to other (reference) options. Building on the notion that loss aversion is more pronounced when comparisons are explicit rather than implicit, we propose that the mere fact that consumers are explicitly told to make particular comparisons induces more risk-averse, cautious choice and bidding behavior. This proposition was supported in a field experiment involving real online auctions, in which comparisons among listings either were done spontaneously by bidders or were encouraged using an explicit instruction to compare the focal auction with adjacent listings. Results showed that explicit reference points (1) diminished the influence of adjacent auction prices on the focal auction's price; (2) led participants to submit fewer, lower, and later bids; (3) increased the incidence of sniping; (4) decreased bidding frenzy; and (5) decreased the tendency to bid on multiple items simultaneously. The impact of explicit comparisons on risk-averse behavior was further tested in a very different context using a laboratory choice experiment. In that study, explicit instructions to compare option sets increased the tendency to choose the compromise, low-risk, and all-average alternatives. We discuss the theoretical and practical implications of this research.