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FACULTY RESEARCH: Perceptions in Fairness

June 23, 2011

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

Tony CuiIf you have ever wondered why popular vanilla ice cream costs the same as the less popular lemon ice cream, both by Dannon, you aren't alone. "As consumers, we are used to paying the same amount for a branded variant, such as a cherry flavored or Diet Coke, as we would for a regular can of Coke," says Assistant Professor Tony Haitao Cui. "However, this pricing strategy seems to go against standard economic theory." In his paper, "The Benefit of Uniform Price for Branded Variants," Cui, with co-author Professor Yuxin Chen (Northwestern University), explores the relationship between uniform pricing for branded variants and consumer perceptions of fairness.

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.

Learn more about Carlson Executive Education's Strategic Pricing program.

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 www.carlsonschool.umn.edu/marketinginstitute.

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