Price Fairness and Strategic Obfuscation

Forthcoming, Marketing Science

44 Pages Posted: 25 Aug 2016 Last revised: 15 May 2020

See all articles by William Allender

William Allender

McMaster University - Michael G. DeGroote School of Business

Jura Liaukonyte

Cornell University

Sherif Nasser

Cornell University

Timothy J. Richards

Arizona State University W. P. Carey School of Business

Date Written: March 14, 2020

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

Suggested Citation

Allender, William and Liaukonyte, Jura and Nasser, Sherif and Richards, Timothy J., Price Fairness and Strategic Obfuscation (March 14, 2020). Forthcoming, Marketing Science, Available at SSRN: https://ssrn.com/abstract=2780170 or http://dx.doi.org/10.2139/ssrn.2780170

William Allender

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Jura Liaukonyte (Contact Author)

Cornell University ( email )

347 Warren Hall
Ithaca, NY 14853
United States

Sherif Nasser

Cornell University ( email )

Ithaca, NY 14853
United States

Timothy J. Richards

Arizona State University W. P. Carey School of Business ( email )

7231 E. Sonoran Arroyo Mall
Mesa, AZ 85212
United States
480-727-1148 (Phone)

HOME PAGE: http://www.east.asu.edu/msabr/faculty/richards.htm

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