Trade-ins, Mental Accounting, and Product Replacement Decisions
Journal of Consumer Research · 2001 · Volume 27 · Issue 4
Abstract
When a consumer who already owns a durable-type product in a category faces the opportunity to upgrade to a new, higher-quality product, the replacement purchase decision is driven by both normative economic factors and psychological factors. As a normative decision maker, s/he considers the purchase price of the new alternative, but s/he additionally considers the mental cost of retiring the old product before s/he has gotten his/her money's worth out of it. During ownership of a product, a consumer mentally depreciates the initial purchase price, thus creating a “mental book value” for the product. The write-off of this mental book value is felt as the mental cost of a replacement purchase. Based on the principles of mental accounting and mental depreciation, I provide a theoretical explanation for this mental cost and why an individual's replacement purchase decision may be more sensitive to the mental cost than the marginal cost. When applied appropriately, mental accounting can serve a useful purpose to the utility-maximizing consumer in the long run, but when misapplied, it results in a misallocation of resources that does not add any value from the perspective of utility maximization. Through three experiments, I measure the negative effect of the write-off on a replacement purchase decision and demonstrate ways in which it can be mitigated. Trade-ins are examined as one way in which a consumer can be guided to make replacement purchase decisions that are more aligned with normative choice.
Keywords
behavioral decision theory, economic psychology, experimental design and analysis (anova)
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