Price Fairness and Strategic Obfuscation

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. The feasibility of such pricing strategy is not well understood. In this paper, we investigate the conditions under which it is profitable for firms to engage in price obfuscation, given the potential fairness concerns of consumers. We study how price obfuscation affects consumer fairness concerns, consumer demand, and equilibrium pricing strategies. The findings suggest that if obfuscation mitigates fairness concerns, it can arise as an equilibrium outcome, even if consumers are aware of the seller's strategic behavior and are able to update their beliefs and expectations about the prices offered to their peers accordingly. To test the theoretical predictions an experiment is conducted in which price obfuscation is varied both exogenously and endogenously. The results confirm that buyers have intrinsic distributional (based on the seller's margins) and peer-induced fairness (due to others being charged different prices) concerns when prices are transparent. In particular, disadvantaged peer-induced fairness concerns enter utility as an intrinsic cost that the seller has to compensate for through lower prices. Obfuscation effectively reduces peer-induced fairness concerns and increases sellers' pricing power. However, this pricing power is constrained by distributive inequity becoming more salient when prices are obfuscated.

Keywords: personalized pricing, fairness, inequity aversion, price discrimination, retail pricing

JEL Classification: D43, L13, M31