JOURNAL OF BUSINESS AND PSYCHOLOGY

Vol. 14, No. 4, Summer 2000

THE MODERATING EFFECT OF

THE SERVICE CONTEXT ON THE
RELATIONSHIP BETWEEN PRICE
AND POST-CONSUMPTION PERCEPTIONS
OF SERVICE QUALITY
Dhruv Grewal
University of Miami

Jerry Gotlieb
Western Kentucky University

Howard Marmorstein
University of Miami

ABSTRACT: A stream of marketing research indicates that price often affects

consumers' pre-purchase perceptions of quality. Interestingly, however, most stud-
ies that have assessed the effect of price on quality have utilized physical products
rather than services. Moreover, the effect of price on assessments of quality has
typically measured before respondents have an opportunity to consume the target
product. This paper reports the results of a study that found that the effect of
price on post-purchase perceptions of service quality is contingent on consumers'
perceptions of contextual cues. Specifically, only when consumers evaluate contex-
tual cues to be worse than their expectations does a higher price increase their
perceptions of service quality. Implications of these findings and avenues for
future research in services are discussed.

A considerable body of research and two recent meta-analyses thereof

(Monroe and Krishnan 1985; Rao and Monroe 1989) suggest that consum-
ers often use a product's price as a heuristic to judge its quality prior

The authors wish to acknowledge the helpful suggestions provided by Diana Grewal,
the three anonymous reviewers and the associate editor—Richard Feinberg.
Dhruv Grewal was partly funded by a School of Business Summer Research Grant at
the University of Miami. All authors contributed equally and the order of authorship is
listed randomly.
Address correspondence to Dhruv Grewal, Department of Marketing, University of
Miami, Coral Gables, FL 33124.
579 © 2000 Human Sciences Press, Inc.
580 JOURNAL OF BUSINESS AND PSYCHOLOGY

to purchase (Dodds, Monroe and Grewal 1991; Rao and Monroe 1989;
Wheatley, Chui and Goldman 1981). Interestingly, however, the large
number of studies of the price-quality effect is not indicative of the limited
range of conditions to which this finding can be generalized.
In fact, the vast majority of studies in this domain share common
characteristics that have led to four important gaps in the marketing
literature. First, the effect of price on assessments of quality has typically
been measured before the subjects have an opportunity to consume the
product. This gap is particularly important because the cognitive process
that consumers use to make pre-purchase judgments seems to be different
from that which is used to make post-purchase judgments (e.g., Gardial
et al. 1994). Second, nearly all price-perceived quality studies have used
absolute prices; thus, there is virtually no empirical evidence concerning
the influence of relative prices (i.e., price expectations) on perceived qual-
ity. However, researchers indicate that consumers' expectations tend to
affect perceived service quality (e.g., Parasuraman, Zeithaml and Berry
1988). Therefore, it may be particularly important to determine whether
the expectation framework should be applied to help understand the
influence of price on service quality. Third, most studies that have as-
sessed the effect of price on quality have used physical products rather
than intangible services. Although there are numerous studies of service
quality (e.g., Cronin and Taylor 1992; Parasuraman, Zeithaml and Berry
1988), the influence of price expectations on post-purchase perceived qual-
ity of services has not been reported in the services quality literature.
Fourth, price-perceived quality research has invariably been conducted
in laboratory settings in which the influence of the physical environment
has not been considered. However, there is empirical evidence which
indicates that the physical environment moderates at least the prepur-
chase perception of services (e.g., Bitner 1992). If the physical environment
also moderates the effect of price expectations on post-purchase perceived
quality, then the physical environment might be a more important vari-
able than has been recognized in the marketing literature. The previous
discussion suggests that the marketing literature has significant gaps
concerning the effects of price, the physical environment, and the cognitive
process through which consumers evaluate post-purchase service quality.
Accordingly, the purpose of this paper is to provide a conceptual frame-
work and empirical evidence that helps fill these four gaps in the market-
ing literature.

BACKGROUND

Price and Pre-Purchase Perceptions of Product Quality

Scitovszky (1945) observed that consumers often judge product qual-
ity by price. Building on this initial essay, Leavitt (1954) conducted the
 D. GREWAL, J. GOTLIEB, AND H. MARMORSTEIN 581

first empirical investigation of the effect of price on perceived product

quality and found that a greater percentage of subjects chose the higher-
priced alternative for product categories perceived to have dissimilar
brands. Tull et al. (1964) found similar results. Subsequently, over 50
empirical studies have assessed the extent to which the price of a product
affects consumers' perceptions of quality. Overall, the findings clearly
support the conclusion that there is a positive price-perceived product
quality relationship (Monroe and Krishnan 1985; Rao and Monroe 1989).
More recent research has advanced this stream by focusing on factors
that may moderate the effect of price on consumers' perceptions of quality
(e.g., Gotlieb and Sarel 1991, 1992). Specifically, research has found that
availability of other information cues, such as brand name, store name,
and product attribute information moderate the price-quality relationship
(e.g., Dodds et al. 1991; Jacoby, Olson and Haddock 1971; Szybillo and
Jacoby 1974; Rao and Monroe 1988). Likewise, individual differences such
as product knowledge (Rao and Monroe 1988), perceived risk level, and
self-esteem (Shapiro 1973) affect the extent to which consumers use price
to judge quality and make purchase decisions.
Post-Purchase Perceptions of Product Quality. One potential limitation
of most past studies is that they simply provide subjects with product
descriptions and prices and ask them to rate their quality (e.g., Dodds et
al. 1991). Therefore, it is important to note that few studies have either
exposed the product to the consumer (e.g., Peterson 1970) or allowed the
product to be used prior to collecting ratings of quality (e.g., Valenzi and
Eldridge 1973).
As a consequence, empirical evidence in the marketing literature
concerning the effect of price on post-purchase perceived product quality
is rare. Moreover, studies in which respondents actually purchased and
used the product are virtually non-existent. If price only influences pre-
purchase perceived quality, then the influence of price might only be
transitory and affect initial adoption. Conversely, if price influences post-
purchase perceived product quality, then the effects of price may be of
even greater importance than has been suggested previously.

Intangibility of Services
One characteristic that differentiates services from goods is their
intangibility. As mentioned earlier, the intangibility of a service creates
an extra burden in assessing quality. While some services are aptly de-
scribed as experience goods (e.g., an eye exam and lens prescriptions),
others are more closely akin to credence products (e.g., surgery). In the
latter cases, most consumers will find it difficult or impossible to evaluate
the service received even after they have consumed it. Thus, previous
research suggesting that consumers are more likely to make use of price
582 JOURNAL OF BUSINESS AND PSYCHOLOGY

information when they lack the expertise to evaluate the product (e.g.,
Rao and Monroe 1988) bears directly on the price-perceived quality rela-
tionship for services. Specifically, this suggests that consumers may con-
tinue to use price as a "heuristic" to evaluate the quality of a service even
after it has been delivered and experienced.

HI: Price will be positively related to consumers'judgments of ser-

vice quality following the service experience.

Inseparability of Services and the Role of Context

Another characteristic that differentiates services from goods is the
inseparability of the service from the production setting. Unlike the case
with most manufactured goods, many services are consumed in the same
setting in which they are produced. Consequently, the production setting
(or service context) may serve as a valuable information cue to the con-
sumer who is seeking to assess service quality. Research that illustrates
the potential impact of context on consumers' judgments is therefore
discussed next.
Some researchers have suggested that contextual cues are so influen-
tial that they should be viewed as the fifth controllable element of the
marketing mix (Booms and Bitner 1981). The physical context is defined
as everything that is visible and/or touchable (Flipo 1991). For example,
the attire worn by a well-dressed financial consultant may imply to the
consumer that this professional service provider is successful and is likely
to be of high quality. Similarly, Mazursky and Jacoby (1985) indicate that
contextual cues provide meaningful non-verbal information to consumers
from which they may make inferences concerning the quality of retail
stores. Other researchers suggest that contextual cues are an important
way in which a service establishment (e.g., fitness center) can differentiate
itself from its competitors (Mehrabian and Russel 1974; Baker, Grewal
and Levy 1992). Thus, contextual cues might provide consumers with a
shortcut or heuristic for judging product and service quality. As a result,
contextual cues may motivate individuals to use or avoid a facility (e.g.,
an HMO). A stream of research now indicates that contextual cues are
in fact associated with perceived service quality (e.g., Baker, Grewal and
Parasuraman 1994; Bitner 1990, 1992; Parasuraman, Zeithaml and Berry
1988).
Returning to the pricing domain, Thaler (1985) conducted an experi-
ment in which subjects indicated how much they would be willing to pay
for a bottle of beer that they would drink at the beach. Two contextual
conditions were created: buy the beer at a nearby resort hotel or buy the
beer at a small, rundown grocery store. The results indicated that the
median estimated price was significantly higher for the positive context
 D. GREWAL, J. GOTLIEB, AND H. MARMORSTEIN 583

(hotel: $2.65) than for the less positive context (grocery store: $1.50).
Similarly, Grewal and Baker (1994) found that contextual cues affected
consumers' price acceptability estimates in a retail setting. In summary,
the marketing and the psychological literatures suggest that contextual
cues are often used to evaluate prices, products, and services.

H2: The physical context will be positively related to consumers'

judgments of service quality following the service experience.

Prospect Theory and the Interactive Effects of Price and Context

Prospect theory suggests that consumers are likely to be more risk
aversive in order to preserve potential gains when a situation or experi-
ence has been positive and there are gains to protect (Kahneman and
Tversky 1979). For example, consumers who have evaluated a service
context to be better than expected have experienced a gain and are there-
fore likely to be risk aversive. As a result, they engage in more thorough
processing of the available information. The logical consequence in this
case is that the impact of any single cue, such as price, on consumers'
judgments of service quality is likely to be minimal.
In contrast, consumers who have found a context to be worse than
expected (i.e., a negative frame or loss situation) are less concerned about
protecting gains or incurring additional risk. In this case, consumers are
less risk averse and may have a tendency to engage in heuristic processing
of available stimuli (Grewal, Gotlieb and Marmorstein 1994). Since price
has been documented to serve as a heuristic for evaluating quality, the
effect of price on post-purchase judgments of service quality is more likely
to be observed. Thus, consumers who encounter a service context that is
worse than expected are more likely to use price as a heuristic to judge
service quality (i.e., a higher price increases their assessments of service
quality). This discussion suggests the following hypothesis:

H3: There will be an interaction effect of price perceptions and con-

textual cue perceptions on post-purchase perceived service qual-
ity. Specifically, the effect of price perceptions on consumers'
post-purchase perceptions of quality is expected to be greater
when their contextual cue perceptions are negative.

METHOD

A stringent test of the hypotheses requires that the service selected

for the study meet two criteria. First, the service should be one that is
provided in a complex contextual environment in which a wide variety of
584 JOURNAL OF BUSINESS AND PSYCHOLOGY

physical and human stimuli have the potential for influencing consumers'
judgments (Bitner 1992). For example, a service that is primarily equip-
ment based would be inappropriate for this study because consumers
might naturally focus on the equipment and/or the facility; this focus
would enhance the probability that the hypotheses would be supported.
Second, the service should not be one for which consumers are likely to
use simple heuristics to judge quality as a result of their low involvement
(Chaiken 1980; Mitra 1995). Bitner (1992) has identified hospital services
as providing a complex physical environment in which consumers tend
to be highly involved. Therefore, the study that follows examines the
effects of price and service context on consumers' post-consumption evalu-
ations of the quality of health care service received.

Sample and Procedures

Systematic random sampling was used to select the subjects that
participated in this survey. The first wave of the survey instrument was
mailed to 849 subjects ten days after they had been released from the
hospital. The questionnaire used in this survey was mailed to every third
subject discharged from the hospital with a random start. Responses were
received from 168 subjects. If a subject did not respond to the first wave
within 14 days, then the subject was mailed the same survey on the
second wave. Sixty-four subjects responded to the second wave. A chi-
square test on several demographic variables such as age, income, and sex
found no significant differences between the respondents to the successive
waves of the survey. The overall response was 232 subjects, for a response
rate of 27 percent.

Measures
A preliminary set of items was developed based on past research
in service and services marketing. The proposed questions were then
examined by medical and administrative personnel in the hospital setting
to be examined. Additionally, a pretest was conducted with a group of
patients. Following receipt of their responses, each pretest patient was
interviewed by one of the researchers. These procedures ensured that the
items were understood and had the intended meaning to a sample of
respondents drawn from the target population.
Perceived Service Quality. The measure of post-purchase perceived service
quality was based on previous research in this domain (e.g., Carman 1990;
Cronin and Taylor 1992; Groonros 1982; Parasuraman, Zeithaml and
Berry 1986). An eight-item, performance-based semantic differential scale
was used in the survey to measure post-purchase perceived quality. The
 D. GREWAL, J. GOTLIEB, AND H. MARMORSTEIN 585

items were the following: "very reliable/very unreliable"; "competent/in-

competent"; "very responsive to my needs/very unresponsive to my needs";
"very credible/not credible"; "easy to contact/difficult to contact"; "very
courteous/not courteous"; "understanding of patient needs/not under-
standing of patient needs"; "communicates very well with me/communi-
cates poorly with me."
Service Context Perceptions. The scales used to measure disconfirmation
of contextual expectations were based on past research in health care
(Ross, Frommelt, Hazelwood and Chang 1987; Zyzanski, Hulka and Cassel
1974). Respondents were asked to rate "the overall physical appearance
of the hospital" and "the equipment available at this hospital" using a
"worse than expected" (1) to a "better than expected" (7) response format.
The two items were summed and divided by two so that the summated
scale ranged from one to seven. These endpoints were selected to control
for differences in the type of medical procedure the patient received and
areas of the hospital that the patient viewed (e.g., cardiac-unit versus
emergency room).
Additionally, these endpoints enabled respondents to evaluate the
health care context relative to their own individual expectations. It must
be noted that a majority of disconfirmation of expectation research has
assessed the construct from the expected performance level rather than
from some "ideal" standard (Tse and Wilton 1988). Consequently, this
format was adopted in the current research.
Price Perception. Price perception was measured by the following item:
"I would rate the price of the hospital's services as: "lower than expected"
(1) to "higher than expected" (7). These endpoints were selected to control
for the specific service received and consequent difference in the magni-
tude of a patient's hospital bill.
Psychometric Properties of the Measures. Procedures suggested by Jore-
skog (1993) were followed to assess the psychometric properties of the
measures. Cronbach's alpha was found to be .95 for the eight item service
quality scale and .83 for the service context scale. Reliability could not
be calculated for the price construct as it was operationalized using a
single item.
Tangibles (such as equipment) are sometimes considered to be a
component of service quality (e.g., Parasuraman et al. 1986). Therefore,
principal component factor analysis was performed on the eight service
quality items and the two contextual cue items. The results indicate that
the eight service quality items loaded on the first factor (eigen-value =
6.86, 68.6% of the variance explained) and the two contextual cue items
loaded on the second factor (eigen value = 1.18, 11.8% of the variance
explained). Over eighty percent of the variance (80.4%) in the items was
586 JOURNAL OF BUSINESS AND PSYCHOLOGY

explained by the two factors. The specific factor loadings were in accord
with theoretical expectations (all eight service quality items loaded on
the first factor—loadings were greater than .78 and cross-loadings were
less than .35 and the two contextual items loaded on the second factor—
loadings were greater than .86 and cross-loadings less than .27). Confirma-
tory factor analysis was also conducted to assess the convergent and
discriminant validity of the service quality and service context constructs.
Procedures suggested by Fornell and Larker (1981) were followed. The
standardized path coefficients for the eight service quality indicators were
all greater than or equal to .75. The standardized path coefficients for
the two service context indicators were .85 and .79. Since these item
reliabilities were greater than .60, they were deemed reliable.
Fornell and Larker (1981) suggest that the average shared variance
for the items of a construct be larger than the square of the correlation
between the constructs. The average shared variances (service quality:
.75 and service context: .67) were greater than the square of the correlation
between the two constructs (.22). Thus, the items used to assess these
two constructs discriminate. Additionally, a chi-square difference test
was conducted between the two factor model (service quality and service
context as two constructs) and the one-factor model (service quality and
service context items as a single construct). The results suggest that the
two-factor model was better (statistically significant difference: chi-square
(df = 1) = 74.28, p <.01).
Finally, Ping (1995) suggests that if the correlation between two
constructs is less than .65, this provides evidence of discriminant validity.
The correlation between service quality and service context was .46, ser-
vice quality and service price was .10, and service context and service
prices was .22. Thus, the results of the set of analyses suggest that the
measures were acceptable.

RESULTS

Hypothesis Testing
To test the hypotheses, a regression analysis was conducted in which
the unstandardized scaled measures of price, context, and their interac-
tion were regressed on service quality (see Table 1). The results indicate
that the model was significant and accounted for 37% of the variance.
Consistent with H1 and H2 respectively, price and context both exerted
significant effects on consumers' judgments of service quality following
the service experience. Furthermore, the interaction of price and the
context was significant (t = 2.11; p < .05). Therefore, the results support
the hypothesis (H3) that the effect of the service price on post-purchase
 D. GREWAL, J. GOTLIEB, AND H. MARMORSTEIN 587

Table 1
The Effects of Disconfirmation of Price Expectations and Disconfirmation
of Contextual Cue Expectations on Post-Purchase Perceived Quality
Independent Variables Beta t-value p-value

Constant -15.57 -.96 .34

A. Disconfirmation of the Price Cue 6.88 2.11 .04
B. Disconfirmation of Contextual Cues 10.27 4.23 .00
A x B Interaction -1.03 -2.11 .04
Note: The models have an F(3,142) = 29.63, p < .001, adjusted R2 = .37.

perceptions of service quality was contingent upon consumers' perceptions

of the service context.
To further understand the nature of the interaction, two different
values for each of the two independent variables were selected—one stan-
dard deviation below the mean, and one standard deviation above the
mean (using procedures suggested by Cronbach 1987; Jaccard, Turrisi
and Wan 1990). Using these values, the effect of service price on post-
purchase service quality was assessed under the two service context levels.
The results support the hypothesis (H3) that the service price-post pur-
chase service quality relationship was more pronounced when the service
context was evaluated less positively.

DISCUSSION

Implications
The results of this study suggest the need to consider the interactive
effects of price and the context when investigating post-purchase percep-
tions of service quality. Together, these variables accounted for thirty-
seven percent of the variance in perceived quality. Further research along
these lines would assist service marketers with decisions concerning ex-
penditures on their physical environment (or service context), particularly
when these capital investments will need to be accompanied by increases
in the price of the service. Moreover, the fact that consumers' expectations
of the service context impact their perceptions of quality emphasizes the
need for marketers to monitor these expectations in order to prioritize
expenditures on service improvements.
As noted earlier, there had been virtually no empirical evidence in
the services literature concerning the influence of price on post-purchase
perceptions of service quality. Identifying the variables that influence
post-purchase cognition is particularly important because building rela-
588 JOURNAL OF BUSINESS AND PSYCHOLOGY

tionships has become increasingly important in the 1990s. Consequently,

it is critical for managers to distinguish between those variables that
have only a temporary effect on perceived quality and other variables
that are likely to have a more enduring effect on perceived quality (i.e.,
affect post-purchase perceived quality), thereby helping to build more
permanent relationships. This research suggests to managers that price
and contextual cues should be placed in that important category of stimuli
that may have a more permanent effect on consumers' perception of post-
purchase quality.
Finally, the "four P's" (i.e., price, product, promotion, place) has been
the predominant framework for examining marketing management deci-
sions. However, service researchers have called for an expanded frame-
work which would identify the physical context as a fifth element in the
marketing mix (e.g., Booms and Bitner 1981). One reason that the pro-
posed change in the marketing literature has not occurred might be that
there has been insufficient empirical evidence to support elevating the
physical context to the fifth element of the marketing mix. The finding
of this study that physical contextual cues do, indeed, moderate the effect
of price helps fill this gap in the literature. Additionally, this study pro-
vides empirical evidence supporting those researchers who believe that
physical contextual cues are more important for the marketing of services
than has been recognized by the literature.

Limitations and Avenues for Future Research

There are a number of limitations of this research. The finding that
price and context accounted for 37% of the variance of post-purchase
perceptions of service quality is encouraging but nonetheless suggests
the need for research examining other evaluation and choice criteria.
Furthermore, in a healthcare setting, the role of price may be less central
than other criteria due to the fact that many consumers pay only a portion
of the monetary price rendering this factor less important in their evalua-
tion of service quality.
Another limitation of this study was the use of a single-item measure
of service price perceptions. The respondents assessed whether the overall
price charged (based on their itemized bill) was higher (or lower) than
expected. The role of other measures of service price, such as perceived
fair price, normal price, lowest available price on consumers' assessments
of service quality needs to be examined. A related limitation is the sole
focus on the monetary component of price, excluding the effects of waiting
time and psychic costs which can be considerable in a hospital setting.
In this research, context was assessed solely in terms of the physical
environment. Other dimensions of the service setting discussed by Bitner
(1992) and Baker, Grewal and Parasuraman (1994) should also be exam-
 D. GREWAL, J. GOTLIEB, AND H. MARMORSTEIN 589

ined. For example, future research should examine whether the social
ambience of the service context also moderates the effect of price on service
quality perceptions.
This study provides the first stage in research aimed at understanding
the effects of price and contextual cues on post-purchase perceived quality.
Future research should attempt to specify the nomological network of
related constructs. Such research would include factors that may mediate
the effects of price and contextual cues on post-purchase perceived quality;
it would also examine their impact on additional dependent variables
such as perceived value and customer satisfaction. For example, price
expectations might also affect perceived risk (Grewal, Gotlieb and Mar-
morstein 1994). Then, perceived risk may influence post-purchase percep-
tions of service quality and future patronage behavior as well.

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