The Impact of Fairness on Product Pricing
Think about the last time you purchased, say, yogurt. It’s safe to assume that nearly every flavor of a specific brand carried an identical price tag. And yet it’s also safe to assume that some flavors are far more popular than others.
While such pricing seems to contradict the fundamental tenets of standard market-demand rules, research by Associate Professor Tony Haitao Cui offers an explanation for it. Uniform pricing, he explains, is linked to consumers’ bias toward fairness. “Uniform prices tend to make consumers feel the company is being fair in its pricing approach,” he says. “And that will tend to make them more likely to purchase the company’s products.”
Cui notes that there’s an additional benefit to uniform pricing, one that factors in the concept of price elasticity — the responsiveness of demand to price changes.
“If the more popular flavor of yogurt has higher elasticity and the firm charges a lower price for it, then demand change will be quite large,” he says. “On the other hand, since the less-popular flavor is more likely to have lower elasticity, demand won’t drop a whole lot if the company raises the price slightly.”
Because uniform pricing lies somewhere in between high and low prices that the firm would charge otherwise, “it can increase sales of more popular products—and not decrease sales of less popular products a lot, as long as the more popular products have higher elasticity than the less popular ones.” Cui notes that the two effects offer a balancing force.
“Companies should ask whether there are differences in elasticity between two variants of the same brand, something which we term as ‘branded variants’,” Cui adds. “If a popular branded variant has higher elasticity and a less-popular variant has lower elasticity, that’s a good opportunity to charge uniform prices. But if it’s the other way around, then it might not be a good idea to charge a uniform price.”
"The Benefit of Uniform Price for Branded Variants." Chen, Y., Cui, T.H., Marketing Science, (2013).