Marketing Seminar (2013-02)

Topic:Economic Implications of Consumer Fairness Concerns

Speaker: Baojun Jiang

Affiliation:Washington University

Time: Wednesday, 22 May, 1:30pm-3:00pm,

Location:Room217, Guanghua Building 2

Abstract:

Consumers with inequity aversion experience some psychological disutility when buying products at unfair prices. Empirical evidence and behavioral research suggest that consumers may perceive a firm’s price as unfair when its profit margin is too high relative to consumers’ surplus. In practice, however, consumers may not be certain about the fairness of the firm’s price, because they may not know the firm’s cost even for search goods, whose quality is readily evaluated before purchase. Since inequity-averse consumers have a higher willingness-to-pay for any given quality when the firm’s cost is higher, a cost-efficient firm may have an incentive to mimic an inefficient firm’s pricing and quality strategies. We develop a game-theoretic model to investigate the effects of consumer inequity aversion on a firm’s pricing and quality decisions as well as on consumer surplus and firm profitability. We highlight several interesting findings. First, a firm’s optimal quality may be non-monotone with respect to the degree of the consumer’s inequity aversion. Second, stronger inequity aversion makes an inefficient firm worse off, but it may benefit an efficient firm. Third, one may intuit that stronger inequity aversion gives consumers higher monetary payoffs, but we show that it may actually lower consumers’ monetary payoffs because the firm may reduce its quality to a greater extent than it reduces its price. Lastly, as the average (expected) cost-efficiency in the market decreases, both the expected quality and the social welfare may increase rather than decrease.

Key Words: behavioral economics, fairness, inequity aversion, asymmetric information, signaling, quality, pricing

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