The Benefit of Uniform Price for Branded Variants

Abstract:     
The extensive adoption of uniform pricing for branded variants is a puzzling phenomenon considering that firms may improve profitability through price discrimination. In the paper, we incorporate consumers' concerns of price fairness into a model of price competition and show that uniform price for branded variants may emerge in equilibrium. Interestingly, we find that uniform pricing induced by consumers' concerns of fairness can actually help mitigate price competition and hence increase firms' profits. Furthermore, an individual firm may not have incentive to unilaterally mitigate consumers' concerns of price fairness to its own branded variants, which suggests the long-run sustainability of the uniform pricing strategy. As a result, fairness concerns from consumers provide a natural mechanism for firms to commit to uniform pricing which enhances their profits.

The paper also studies how uniform pricing may affect firms' choices of channel structures. We show that with strong concerns of price fairness from consumers, competing firms are more likely to adopt integrated channels. The reason is that firms may not need to rely on decentralized channel structures to soften competition in the presence of fair-minded consumers because uniform pricing strategy itself mitigates price competition.

Keywords: Pricing, Price Fairness, Behavioral Economics

JEL Classifications: D03, D43, L11, L13, L22, M31

Working Paper Series