Signaling Through Price and Quality to Consumers with Fairness Concerns

Guo X, Jiang B (2016) Signaling through price and quality to consumers with fairness concerns. Journal of Marketing Research (Forthcoming)

67 Pages Posted: 8 Feb 2015 Last revised: 16 Sep 2016

See all articles by Xiaomeng Guo

Xiaomeng Guo

Washington University in St. Louis - John M. Olin Business School

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

Date Written: February 29, 2016

Abstract

Consumers with inequity aversion experience some psychological disutility when buying products at unfair prices. Empirical evidence and behavioral research suggest that consumers may perceive a firm’s price as unfair when its profit margin is too high relative to consumers’ surplus. We develop a game-theoretic model to investigate the effects of the consumer’s inequity aversion on a firm’s optimal pricing and quality decisions. We highlight several interesting findings. First, because of the consumer’s uncertainty about the firm’s cost, the firm’s optimal quality may be non-monotone with respect to the degree of the consumer’s inequity aversion. Second, stronger inequity aversion makes an inefficient firm worse off, but may benefit an efficient firm. Third, we show that stronger inequity aversion by the consumer can actually lower the consumer’s monetary payoff (economic surplus) because the firm may reduce its quality to a greater extent than it reduces its price. Lastly, as the expected cost-efficiency in the market decreases, both the expected quality and the social welfare may increase rather than decrease.

Keywords: behavioral economics, fairness, inequity aversion, asymmetric information, signaling, quality, pricing, search goods, marketing

Suggested Citation

Guo, Xiaomeng and Jiang, Baojun, Signaling Through Price and Quality to Consumers with Fairness Concerns (February 29, 2016). Guo X, Jiang B (2016) Signaling through price and quality to consumers with fairness concerns. Journal of Marketing Research (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2561611 or http://dx.doi.org/10.2139/ssrn.2561611

Xiaomeng Guo

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Baojun Jiang (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
557
Abstract Views
5,859
rank
50,932
PlumX Metrics