Consumer Fairness Concerns and Dynamic Pricing in a Channel

Wen Diao (), Mushegh Harutyunyan () and Baojun Jiang ()
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Wen Diao: Department of Marketing, Shanghai University of Finance and Economics, Shanghai 200433, China
Mushegh Harutyunyan: Department of Analytics, Marketing and Operations, Imperial College Business School, London SW7 2AZ, United Kingdom
Baojun Jiang: Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130

Marketing Science, 2023, vol. 42, issue 3, 569-588

Abstract: The extant literature has shown that when a firm increases its price because of increased demand, some consumers may have fairness concerns and experience psychological disutility when buying the firm’s product. This paper provides a two-period model to study the effects of consumers’ fairness concerns on firms’ dynamic pricing strategies and profits in a channel. Our analysis reveals a strategic link between the two periods—the retailer has a cost-reduction incentive of lowering its first-period price to induce the manufacturer to reduce the wholesale price in the second period. When the retailer’s cost-reduction incentive prevails, in equilibrium, the retail price stays unchanged, whereas the wholesale price decreases over time. Hence, our results provide an alternative explanation for the empirical observation that retail prices typically do not decrease when wholesale prices do. Further, we find that a higher demand increase in the second period can lead to a decrease in both wholesale and retail prices. Importantly, we show that consumer fairness concerns can result in a win-win outcome for the manufacturer and the retailer, which suggests that firms may prefer not using tactics such as price framing to alleviate fairness concerns.

Keywords: fairness; behavioral economics; dynamic pricing; channel (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:42:y:2023:i:3:p:569-588

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