TY - JOUR
T1 - Price fairness and strategic obfuscation
AU - Allender, William J.
AU - Liaukonyte, Jura
AU - Nasser, Sherif
AU - Richards, Timothy J.
N1 - Funding Information:
This work was supported by the Cornell University Dyson School Faculty Research Program, the Dake Family Endowment and the Social Sciences and Humanities Research Council of Canada [Grant 435-1393-2016].
Publisher Copyright:
© 2020 The Author(s).
PY - 2021
Y1 - 2021
N2 - Firms are increasingly using technology to enable targeted, or “personalized,” pricing strategies. In settings where prices are transparent to all consumers, however, there is the potential for interpersonal price differences to be perceived as inherently unfair. In response, firms may strategically obfuscate their prices so that direct interpersonal com-parisons are more difficult. The feasibility of such a pricing strategy is not well understood. In this paper, we investigate the conditions under which it is profitable for firms to engage in price obfuscation, given the potential fairness concerns of consumers. We study how price obfuscation affects consumer fairness concerns, consumer demand, and equilibrium pricing strategies. The findings suggest that if obfuscation mitigates fairness concerns, it can arise as an equilibrium outcome, even if consumers are aware of the seller’s strategic behavior and are able to update their beliefs and expectations about the prices offered to their peers accordingly. To test the theoretical predictions, an experiment is conducted in which price obfuscation is varied both exogenously and endogenously. The results confirm that buyers have intrinsic distributional (based on the seller’s margins) and peer-induced fairness (due to others being charged different prices) concerns when prices are transparent. In particular, disadvantaged peer-induced fairness concerns enter utility as an intrinsic cost that the seller has to compensate for through lower prices. Obfuscation effectively reduces peer-induced fairness concerns and increases sellers’ pricing power. However, this pricing power is constrained by distributive inequity becoming more salient when prices are obfuscated.
AB - Firms are increasingly using technology to enable targeted, or “personalized,” pricing strategies. In settings where prices are transparent to all consumers, however, there is the potential for interpersonal price differences to be perceived as inherently unfair. In response, firms may strategically obfuscate their prices so that direct interpersonal com-parisons are more difficult. The feasibility of such a pricing strategy is not well understood. In this paper, we investigate the conditions under which it is profitable for firms to engage in price obfuscation, given the potential fairness concerns of consumers. We study how price obfuscation affects consumer fairness concerns, consumer demand, and equilibrium pricing strategies. The findings suggest that if obfuscation mitigates fairness concerns, it can arise as an equilibrium outcome, even if consumers are aware of the seller’s strategic behavior and are able to update their beliefs and expectations about the prices offered to their peers accordingly. To test the theoretical predictions, an experiment is conducted in which price obfuscation is varied both exogenously and endogenously. The results confirm that buyers have intrinsic distributional (based on the seller’s margins) and peer-induced fairness (due to others being charged different prices) concerns when prices are transparent. In particular, disadvantaged peer-induced fairness concerns enter utility as an intrinsic cost that the seller has to compensate for through lower prices. Obfuscation effectively reduces peer-induced fairness concerns and increases sellers’ pricing power. However, this pricing power is constrained by distributive inequity becoming more salient when prices are obfuscated.
KW - Fairness
KW - Inequity aversion
KW - Personalized pricing
KW - Price discrimination
KW - Retail pricing
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U2 - 10.1287/mksc.2020.1244
DO - 10.1287/mksc.2020.1244
M3 - Article
AN - SCOPUS:85100545096
SN - 0732-2399
VL - 40
SP - 122
EP - 146
JO - Marketing Science
JF - Marketing Science
IS - 1
ER -