What Makes a Price Fair? An Experimental Study of Transaction Experience and Endogenous Fairness Views

64 Pages Posted: 6 Jul 2016

See all articles by Holger Herz

Holger Herz

University of Zurich

Dmitry Taubinsky

Harvard University

Date Written: October 2016

Abstract

People’s fairness preferences are an important constraint for what constitutes an acceptable economic transaction, yet little is known about how these preferences are formed. In this paper, we provide clean evidence that previous transactions play an important role in shaping perceptions of fairness. Buyers used to high market prices, for example, are more likely to perceive high prices as fair than buyers used to low market prices. Similarly, employees used to high wages are more likely to perceive low wages as unfair. Our data further allows us to decompose this history dependence into the effects of pure observation vs. the experience of payoff-relevant outcomes. We propose two classes of models of path-dependent fairness preferences - either based on endogenous fairness reference points or based on shifts in salience - that can account for our data. Structural estimates of both types of models imply a substantial deviation from existing history-independent models of fairness. Our results have implications for price discrimination, labor markets, and dynamic pricing.

Keywords: reference points, fairness, salience, bargaining, endogenous preferences, price stickiness

JEL Classification: D010, D030, C900, C780

Suggested Citation

Herz, Holger and Taubinsky, Dmitry, What Makes a Price Fair? An Experimental Study of Transaction Experience and Endogenous Fairness Views (October 2016). CESifo Working Paper Series No. 5936. Available at SSRN: https://ssrn.com/abstract=2805400

Holger Herz (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Dmitry Taubinsky

Harvard University ( email )

Cambridge, MA
United States

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