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 peer-induced 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 if the demand of the product category is expandable. 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.

Number of Pages in PDF File: 37

Keywords: pricing, peer-induced fairness, price fairness, behavioral economics

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

working papers series