FACULTY RESEARCH: Perceptions in Fairness
Tony Cui's research found that uniform pricing may increase total demand for all branded variants and it may be in the firm's best interest to facilitate fairness concerns unilaterally.
The Benefit of Uniform Prices for Branded Variants
One would think that because consumer demand tends to be different across branded variants, firms would choose to price them accordingly to maximize profitability. So, why do companies apply a uniform price? Cui and Chen suggest that consumers' concerns of fairness may provide an appropriate answer to this intriguing phenomenon. If a customer found that he or she had to pay more for an extra-large t-shirt than other people are paying for a small size t-shirt of the same brand, that customer might be less interested in the t-shirt.
Building on existing research suggesting fairness as a key contributor in consumer perceptions, Cui finds that peer-induced fairness is particularly powerful. Here peer-induced fairness refers to the fact that consumers may compare their benefits with other consumers' benefits to judge whether they are treated fairly. The authors suggest that consumer fairness concerns provide a natural credible mechanism for firms to be engaged in uniform pricing of branded variants. In turn, this is shown to lead to higher profits. The research also finds that uniform pricing may increase total demand for all branded variants and that it may be in a firm's best interest to facilitate fairness concerns unilaterally.
This research has implications for any industry that sells horizontally differentiated products including grocery products like yogurt, apparel products like clothes and shoes, and even baby products. In a time when emerging niche markets are getting a lot of media attention, firms should be wary of niche pricing strategies. Cui's next step is to uncover the intensity of consumer concerns of fairness and the relative impact on a firm's profitability.
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Reprinted with permission of the Institute for Research in Marketing, Carlson School of Management, University of Minnesota. More information on the Institute can be found at carlsonschool.umn.edu/faculty-research/institute-research-in-marketing.