Competitive Implications of Consumer Fairness Concerns

47 Pages Posted: 9 Sep 2016 Last revised: 15 Jul 2017

See all articles by Mushegh Harutyunyan

Mushegh Harutyunyan

Nazarbayev University Graduate School of Business

Baojun Jiang

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

Chakravarthi Narasimhan

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

Date Written: July 13, 2017

Abstract

When consumers perceive that a firm’s price or markup is unfairly high, they become less willing to purchase that firm’s product. Hence, one might intuit that the existence of such fair-minded consumers would tend to induce firms to reduce their prices, lowering their profits and increasing the consumers’ surplus. Contrary to this conventional wisdom, our analysis reveals that having a segment of fair-minded consumers in the market has a non-monotonic effect on the firms’ profits. More specifically, if the fraction of consumers having fairness concerns is small, consumers’ fairness concerns can actually alleviate price competition, making firms better off and consumers worse off. Within that range, an increase in the fraction of fair-minded consumers can increase the firms’ profits and reduce the consumers’ surplus. But when the fraction of fair-minded consumers is sufficiently high, the firms will compete more aggressively, in which case consumers’ fairness concerns will benefit consumers and reduce the firms’ profits.

Keywords: Fairness, behavioral economics, pricing, competitive strategy, segmentation

Suggested Citation

Harutyunyan, Mushegh and Jiang, Baojun and Narasimhan, Chakravarthi, Competitive Implications of Consumer Fairness Concerns (July 13, 2017). Available at SSRN: https://ssrn.com/abstract=2835837 or http://dx.doi.org/10.2139/ssrn.2835837

Mushegh Harutyunyan

Nazarbayev University Graduate School of Business ( email )

HOME PAGE: http://https://sites.google.com/view/harutyunyan

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/

Chakravarthi Narasimhan

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

One Brookings Drive, Campus Box 1133
Olin School of Business
St. Louis, MO 63130-4899
United States
314-935-6313 (Phone)
314-935-6359 (Fax)

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