The Impact of Service Deregulation on Buyers' Reliance of a Market-Based Reference Price: A Test in a B2B Insurance Context

Abstract

For decades, there has been a growing trend toward deregulation in services industries. What deregulation means for buyer behavior remains a relatively unexplored area of research. This article focuses on price deregulation within services and examines how the change from a regulated to a deregulated pricing environment will moderate the extent to which service buyers use a market-based reference price (MBRP) when forming price perceptions. Competing expectations are developed and then empirically tested in a commercial insurance context. The results suggest deregulation increases the impact of a MBRP. The article concludes by discussing the implications of the findings from a theoretical, managerial, and public policy perspective.

KEYWORDS:

• buyer behavior
• insurance deregulation
• price ceiling
• price floor
• reference price
• services

Notes

Loss ratio is defined as the losses incurred by an insurer due to claims payouts relative to revenue from premium payments remitted by policyholders (Grabowski et al., 1989). Higher loss ratios mean lower profit margins for insurers.

The prices of insurance are generally subject to the approval of a state commission. The most common approach is known as prior approval, in which any proposed rates submitted by an insurer must be approved by the governing commission before their use in actual policies offered for sale by that insurer (Haugen & Kroncke, 1971).