Separating substitution and psychological effects of price with a two-step conjoint approach: Application to luxury goods

Price can have direct psychological effects on utility, beyond the standard indirect substitution effect through its impact on the budget available for other goods. This paper proposes a theory driven modeling framework to (i) empirically disentangle and measure the psychological and substitution effects of price, and (ii) identify heterogeneous drivers of the psychological effect. We then provide a two-step conjoint design to collect necessary data to identify the model and a method to estimate it. We illustrate how the modeling framework can be used with secondary luxury purchase data to measure the psychological and substitution effect, when data on consumer budget for the category is available. We then illustrate our conjoint method, by collecting data for the luxury goods and estimating the model. We find three segments with heterogeneous drivers of the psychological effect: price prestige seeking, self-reward, and price prestige avoidance.