Strategic Obfuscation and Price Fairness

Abstract

Firms are increasingly using technology to enable targeted, or "personalized" pricing strategies. In settings where prices are transparent to all consumers, however, there is the potential that inter-personal price differences will be perceived as inherently unfair. In response, firms may strategically obfuscate their prices so that direct interpersonal comparisons are more difficult. We conduct an experimental analysis of strategic price obfuscation allowing the seller to pay to obscure prices between buyers, so both the level of obfuscation and prices are endogenously determined. The results suggest that buyers do have intrinsic distributional (based on the retailer's margins) and peer-induced fairness (due to others being charged different prices) concerns. Moreover, peer-induced fairness differs significantly depending on whether the buyer receives the higher or lower price offer. In particular, disadvantaged peer-induced fairness concerns enter utility as an intrinsic cost that the seller has to compensate for through lower prices. In contrast, sellers are able to charge marginally higher prices to the advantaged buyers because the peer-induced fairness concern actually increases utility. In addition, we find that obfuscation does not negatively impact the likelihood a buyer will make a purchase, even when the buyer knows obfuscation is taking place.

Keywords: Fairness, Inequity Aversion, Price Discrimination, Retail Pricing, Experimental Economics

JEL Classification: D43, L13, M31