Transactional fairness and unfair price discrimination in consumer markets

Bruce Lyons and Robert Sugden
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Bruce Lyons: Centre for Competition Policy and School of Economics, University of East Anglia

No 2020-07, Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) from Centre for Competition Policy, University of East Anglia, Norwich, UK.

Abstract: There is growing public concern about the ‘unfairness’ of many pricing practices that have become common in consumer, particularly digital, markets (e.g. auto-renewal at a high price, expensive default add-ons). Industrial and behavioural economists have developed theories that explain the conditions under which these practices are profitable for firms, and their implications for consumer welfare. We argue that there is a mismatch between the welfare economic principles on which this theoretical work is grounded and the normative perspective in which the pricing strategies in question are viewed as unfair. As a result, when regulators look to economics for guidance about fair pricing, they struggle to reconcile two fundamentally different normative approaches. We develop a concept of ‘transactional fairness’, grounded in the normative approach of Sugden’s ‘Community of Advantage’, that is reflective of public concerns. Transactional fairness requires satisfaction of ‘no deception’, ‘no hindrance’ and ‘public explanation’ criteria. It is complementary to established welfare criteria of economic efficiency and distributional equity, but is based entirely on the relationship between individual buyer and seller. Transactional fairness establishes clear principles with realistic information requirements that are appropriate for compliance by firms. The approach potentially helps restore public faith in markets without either deterring the emergence of (non-deceptive and non-hindering) business models, or requiring frequent ad hoc fire-fighting interventions by regulators.

Keywords: Price discrimination; unfair pricing; consumer law; competition policy (search for similar items in EconPapers)
JEL-codes: D61 D63 K21 K23 L40 L51 (search for similar items in EconPapers)
Date: 2020-10-01
New Economics Papers: this item is included in nep-com and nep-law
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