Consumer Fairness Concerns and Dynamic Pricing in a Channel

Marketing Science, Forthcoming

118 Pages Posted: 2 Aug 2019 Last revised: 26 Apr 2022

See all articles by Wen Diao

Wen Diao

Fudan University - School of Management

Mushegh Harutyunyan

Imperial College Business School

Baojun Jiang

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

Date Written: February 1, 2021

Abstract

The extant literature has shown that when a firm increases its price due to increased demand or consumer valuation, some consumers may have fairness concerns and experience psychological disutility when buying the firm’s product. This paper provides a two-period model to study the effects of consumers’ fairness concerns on firms’ dynamic pricing strategies and profits in a channel. Our analysis reveals a strategic link between the two periods—the retailer has a cost-reduction incentive of lowering its first-period price to induce the manufacturer to reduce the wholesale price in the second period. When the retailer’s cost-reduction incentive prevails, in equilibrium, the retail price stays unchanged while the wholesale price decreases over time. Hence, our results provide an alternative explanation for the empirical observation that retail prices typically do not decrease when wholesale prices do (Anderson et al. 2015). Further, we find that a higher demand increase in the second period can lead to a decrease in both wholesale and retail prices. Importantly, we show that consumer fairness concerns can result in a win-win outcome for the manufacturer and the retailer, which suggests that firms may prefer not using tactics such as price framing to alleviate fairness concerns.

Keywords: fairness, behavioral economics, dynamic pricing, channel, double marginalization

JEL Classification: M31, D21

Suggested Citation

Diao, Wen and Harutyunyan, Mushegh and Jiang, Baojun, Consumer Fairness Concerns and Dynamic Pricing in a Channel (February 1, 2021). Marketing Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3431085 or http://dx.doi.org/10.2139/ssrn.3431085

Wen Diao

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Mushegh Harutyunyan (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Baojun Jiang

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/

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