UNIVERSITY OF GRONINGEN
FACULTY OF ECONOMICS AND BUSINESS
DYNAMIC PRICING AND ITS PRICE UNFAIRNESS
PERCEPTIONS
Author: Arjen Tuinstra
1st supervisor: J.E.M. van Nierop 2nd supervisor: Niels Holtrop
ABSTRACT
Index
1 INTRODUCTION ...5
1.1 Background ...5
1.2 Problem statement ...5
2 THEORETICAL FRAMEWORK ...8
2.1 A1: Perceived price unfairness & A2: Purchase intention ...9
2.2 B: Price difference ...9
2.3 C: Rationale given by firm... 10
2.4 D:Firm reputation ... 10
2.5 E: Internal reference price... 11
2.6 F: Consumer characteristics ... 11
2.7 G: Consumer price sensitivity ... 12
2.8 H1: Product class involvement & H2: Purchase frequency ... 12
2.9 I: Trust in relationship ... 13
3 RESEARCH DESIGN ... 14
3.1 Design ... 14
3.2 Procedure ... 15
3.3 Measurement of scales... 16
3.4 Analysis plan – Data structure ... 17
3.5 Analysis plan – Model specification ... 17
4 RESULTS ... 18
4.1 Respondent population ... 18
4.2 Scale validation ... 19
4.3 Perceived price unfairness & Repurchase intention ... 20
4.4 Residual error covariance ... 21
4.6 Effect of independent variables on perceived price unfairness... 23
4.7 Latent class analysis ... 25
4.8 Hypothesis rejection ... 28
5 CONCLUSION ... 30
5.1 Discussion ... 31
6 APPENDIX ... 33
APPENDIX 1 PRICE UNFAIRNESS DISTRIBUTIONS... 33
APPENDIX 2 MODERATION EFFECTS ... 34
APPENDIX 3 SAMPLE SCENARIO TEXT ... 35
1
INTRODUCTION
1.1 Background
Since the introduction of the internet is has become more and more feasible to target individual consumers with products tailored to their needs. By combining customer level insights and the necessary interaction response capabilities firms are able to customize their goods and services in a customer centric way (Ramani and Kumar 2008). This means that firms are able to individualize and customize products and offer them on their website to customers. One way firms can customize their offer to customers is by setting different prices for different consumers. Keeping all other parts of an offering the same but charging a different price for different consumers gives firms the potential to maximize their profit. Studies have already shown the potential to generate extra revenues and profit through use of dynamic pricing strategies (Sahay 2007). By making use of different willingness to pay levels for different consumers firms get the potential to charge exactly what each customer wants to pay for their offering and thus capture more of the consumer surplus (Garbarino and Lee 2003). While price discrimination is not a new phenomenon, what is new is the level of focus. Individual customers may now be offered different prices based on the data that firms can collect. Firms can for example use browsing behavior or data from previous purchases to compute an optimal selling price. There are many existing examples of price discrimination such as student or elderly discounts (Carroll and Coates, 1999). There are also instances in which firms charge different prices based on the location of the store. These practices however were on a group level and thus did not directly manipulate prices per consumer. New practices allow real time pricing for example in the airline industry where Delta airlines experimented recently by charging frequent flyers higher prices than regular passengers when they logged in to their website (Sanburn 2012). These practices of individual level price discrimination are promising from the firms point of view and they also resonates with literature about customer centricity as a way of differentiating between less and more profitable customers.
1.2 Problem statement
offering different prices for the same good resulted in consumers filing complaints and bad publicity in the media (Adamy 2000). Individual price discrimination strategies thus have potential negative consequences for firms who are looking to adopt them.
Negative consumer responses to individual level pricing can be understood better in the light of price fairness perceptions. Not much is currently known about the effect of dynamic pricing strategies on the perception of price unfairness by consumers (Haws and Bearden 2006). Dual entitlement can be used to explain unfair reactions to prices as it states that consumers do not mind firms making a profit but those profits should not exceed reference points (Kahneman, Knetch, and Thaler 1986). Raising prices due to shifts in demand is not acceptable for consumers for example, however in situations where prices were raised consumers reacted less negatively if the increase in price was attributable to increased costs for the seller (Bolton and Alba 2006). The principle of distributive justice explains that consumers remain in relationship with a firm if both parties in a transaction are rewarded according to what they have invested in the relationship (Homans 1961). It also helps to think about price fairness in terms of satisfactions as they can symbolize the same thing but are different concepts (Ordóñez, Connolly, and Coughlan 2000) (Oliver and Swan 1998). Equity theory can furthermore be used to explain the comparison of outcomes from oneself to other reference points such as other consumers (Adams 1965). Purchasing a good at a higher price than another consumer could induce feelings of inequality and lead to perceived unfairness leading to dissatisfaction with the purchase. Prices should be perceived as being just and reasonable to consumers. Consumers can form an opinion on the price they are offered by comparing how much both the consumer and the firm have to sacrifice and how much they gain from the transaction (Bolton, Warlop and Alba 2003). Individual price discriminations could thus violate both the equality of outcomes from consumer to consumer, furthermore individual pricing may violate consumer (price) reference points.
consumer, another purchase a firm or others (Xia, Monroe and Cox 2004). Furthermore consumers may compare the price, but also the situation or the context in which the price was offered. Xia, Monroe and Cox (2004) have proposed a comprehensive framework that shows the interplay leading to perceived price unfairness. Reference prices may thus be important in price discrimination situations where the price offered to another consumer is used to evaluate the fairness of a consumers own transaction (Martins 1995).
What is perceived as fair and unfair by consumers is not a straightforward question and cannot be evaluated by just comparing prices to a reference point. Transactions in which one consumers paid less than another may not be judged as equally unfair according to both. If consumers are being charged a lower price than their peer they may perceive this as unfair but not as unfair as the other way around (Ordóñez, Connolly, and Coughlan 2000). Furthermore what is perceived as fair may be different than what is considered unfair by consumers. Previous research has shown that for consumers it is much easier to visualize what is unfair than what is fair (Finkel 2001). Research has also shown that not only inputs and outputs of transactions matter for consumers but also the satisfaction consumers gained from the transaction itself (Oliver and Swan 1989). The importance of the purchase or transaction has the potential to mitigate the unfair reactions associated with price discrimination. The rationale (motive) for differences in prices and price increases that are given to consumers also influence their perception of unfairness (Campbell 1999) (Vaidyanathan and Aggrarwal 2003). This means that certain price increases or differences in price may be seen as fair and others may be seen as unfair. Furthermore social and economic differences between consumers may affect the perception of fairness of an offering (Maxwell 1995). Not all consumers may thus react equally strong to individual price discrimination..
react differently to scenarios of price discrimination a latent class analysis is used to find distinct groups of customers that differ in their response. This research will thus help firms identify under what conditions price discrimination and thus dynamic pricing is acceptable to consumers. The following research questions stems from this :
(1) How can firms engage in dynamic pricing strategies without seriously negative consumer responses?
What follows in the next part of this paper is the theoretical framework in which the variables are defined and the conceptual model is presented. This part will review the current literature available about the subject and present their most important findings. Hypothesis are formulated at each section. Chapter 2 describes the methodology part of this research, chapter 3 continues with analysis of the results. Finally chapter 4 concludes this paper and gives discussion for future research.
2
THEORETICAL FRAMEWORK
H1 = Perceived price unfairness has a negative effect on repurchase intention. H2 = Price difference has a positive effect on perceived price unfairness. H3 = Firm reputation has negative effect on perceived price unfairness.
H4 = Internal reference price makes the relationship of price difference on perceived price unfairness weaker.
H5 = Price sensitivity makes the relationship of price difference on perceived price unfairness stronger.
H6a = Product class involvement has positive effect on the perceived price unfairness. H6b= Purchase frequency has a positive effect on perceived price unfairness.
H7 = Trust in relationship has negative effect on perceived price unfairness.
2.1 A1: Perceived price unfairness & A2: Purchase intention
Price fairness is a psychological construct in which consumers rate or compare the price they have to pay with a reference point (Xia, Monroe and Cox 2004). Consumers may for example compare the price they are offered for a product with the price that they have paid in the past. Whether a price is perceived as fair depends on whether consumer perceive it as just, acceptable and reasonable (Bolton, Warlop and Alba 2003). For a firm pricing your goods fairly is important to gain consumers preference. We limit this research to unfairness perceptions as it has been suggested that fairness and unfairness may be different concepts in the mind of consumers (Finkel 2001). It has been shown that generally consumers have a clearer idea of what they feel is unfair compared to what is fair (Xia, Monroe and Cox 2004). Many factors influence the perception of fairness when consumers compare prices. For example it makes a difference how similar the consumer is who serves as reference point. When a reference consumer is very similar, differences in price are seen as more unfair than when the reference point is very different from the consumer making the comparison. (Xia, Monroe and Cox 2004). When a transaction or price is perceived as unfair this may lead to lower satisfaction, complaints and lower purchase intention (Campbell 1999) (Martins 1995). Similar to previous research we hypothesize that perceptions of unfairness will lead to lower consumer repurchase intention.
H1 = Perceived price unfairness has a negative effect on repurchase intention.
2.2 B: Price difference
Consumers nowadays have more ability to compare prices with other consumers through comparison via internet (Cox 2001). This means consumers are better able to find out what
other consumers have paid for products or even how the price of a good evolves over a period of time. Previous research has consistently shown that price differences for the same good between consumers are judged as unfair (Martins 1995) (Heussler, Volhardt and Ahlert 2009) (Grewal, Hardesty and Iyer 2004). In this research price difference represents the difference in price offered for a good to the focal consumer relative to the price offered to another reference consumer. The price that the reference consumer had to pay functions as a reference point. The concept of a reference point or reference price has been widely accepted in marketing literature (Kalyanaram and Winer 1995). We expand upon the principle of dual entitlement and propose that a reference transaction may also be those made by another consumer instead of just the consumers own previous transactions or competitor prices (Kahneman, Knetsch and Thaler 1986a) (Bolton, Warlop and Alba 2003). Individual price discrimination practices may provoke stronger reactions of unfairness compared to cases where the price difference is due to another reason such as geographic location. Previous authors have found that from different reasons why prices vary, individual differences based on the consumer are seen as most unfair (Haws and Bearden 2006). We propose that consumers will perceive having to pay a higher price for a good than a reference consumer as unfair. The larger the difference between the focal consumer and the price that was offered to the reference consumer the stronger the effect.
H2 = Price difference has a positive effect on perceived price unfairness.
2.3 C: Rationale given by firm
Firms may give a motivation or rationale for why it charges different prices for the same good to two different customers. Previous research has even shown that a human source that delivers this rationale decreased unfairness reactions compared to a non-human source (Campbell 2007). This is promising for firms as it gives them some control over the potential negative consequences of individual price discrimination strategies. Furthermore priming consumers to consider the fairness of a deal also works to manage consumer reactions (Nye and Maxwell 1999). We give no hypothesis but will investigate different scenarios and their effect on the perceived unfairness of a price. We expect to find that different rationales will provoke different reactions on perceived price unfairness.
2.4 D:Firm reputation
assumptions about the reason for price discrepancies between two consumers. Campbell (1999) also showed that a firm’s good reputation may serve as an initial sign of trust for consumers. We propose that reputation can serve as a buffer and decrease the negative perception of price discrepancies. Consumers who rate a firm higher on the reputation scale are assumed to judge the price difference as less unfair.
H3 = Firm reputation has negative effect on perceived price unfairness.
2.5 E: Internal reference price
Whenever consumers form an opinion of fairness it is always comparative in nature, one factor that could moderator the perceived unfairness of a price is consumers own internal reference price. It has been shown that a discrepancy between internal reference prices can impact brand choice and thus modify consumers decision process (Kumar, Karande and Reinarzt 1998). In this case we are not interested in how these reference prices form as consumers often have trouble forming accurate reference transactions (Dickson and Sawyer 1990) but only on its effect on unfairness perceptions. There is considerable literature that discusses both reference price and internal reference price and its effects on demand for products (Kalyanaram and Winer 1995). We argue that the internal reference price can moderate the effect of price difference on perceived price unfairness. Consumers may react negatively when they are forced to pay more than another consumer, if their own internal reference price is higher than the price they were offered this could reduce the perceived unfairness. We thus hypothesize that when an offer is priced below the internal reference price this reduces some of the unfairness perception from first degree price discrimination.
H4 = Internal reference price makes the relationship of price difference on perceived price unfairness weaker.
2.6 F: Consumer characteristics
2.7 G: Consumer price sensitivity
Consumer who are price sensitive may pay extra attention to discrepancies in the price they pay versus the price a reference consumers has paid. This means that any potential difference may be illuminated and lead to a stronger perception of unfairness. The price sensitivity could thus in the same way as the internal reference price moderate the effect of price difference on perceived unfairness. We investigate his possibility in this research by asking how price sensitive consumers are. We use the definition by Lichtenstein et al (1993) as “ a buyer’s “unwillingness” to pay a higher price for a product”. The role of this variable has not been looked at before when identifying consumer reactions to individual pricing. Consumers who are most interested in getting a good deal for themselves may attribute differences between prices offered to consumers to firm profits (Campbell 1999). We hypothesize that consumers who are more price sensitive react more strongly to dynamic pricing practices and thus price sensitivity has a positive impact on the relationship between price difference and perceived unfairness.
H5 = Price sensitivity makes the relationship of price difference on perceived price unfairness stronger.
2.8 H1: Product class involvement & H2: Purchase frequency
Similarly consumers who frequently buy a type of good may be more knowledgeable about its price level and this may lead to stronger unfairness perceptions. Previous authors have already shown that loyal consumers react more strongly to unfair prices due to their emotional attachment to the firm (Feinberg et al 2002). Simply purchasing more frequently however is not the same as involvement, there are many utilitarian products that consumers bu y frequently but in which they take no pleasure or interest. Furthermore consumers can also frequently buy products for others when role shopping without feeling any involvement themselves. By measuring the transaction frequency we also gain insight in another potential predictor of unfairness reactions. We hypothesize that consumers who have a higher purchase frequency perceive the price they are offered as more unfair when there is a difference to a reference consumer.
H6a = Product class involvement has positive effect on the perceived price unfairness. H6b= Purchase frequency has a positive effect on perceived price unfairness.
2.9 I: Trust in relationship
We define trust as done by Mayer Davis and Schoorman (1995) “The willingness of a party to be vulnerable to the actions of another party”. Many authors have looked at trust as an important concept in relationship marketing (Sirdeshmukh, Singh and Sabel 2002). Previous research found that dynamic pricing leads to lower levels of trust in firms (Garbarino and Lee 2003). This means consumers react negatively to firms using these strategies. The decrease in trust however is measured after consumers had found out about the dynamic pricing practices of the focal firm.. According to Campbell (1995) firm reputation can make consumers trust firms more and may decrease negative effects of individual price discrepancies. Individual price differences may thus lower trust after consumers find out they had to pay more, however an initial level of trust may serve as a buffer to perceived price unfairness. We hypothesize that when consumers have trust in the firm selling a product they will react less strongly to price differences. Thus in line with Garbarino and Lee (2003) consumers may lose their trust in firms when they find out about dynamic pricing strategies, their initial trust however is likely to lead to less strong unfairness reactions
3
RESEARCH DESIGN
This part describes the design of the study and the data collection procedure in order to answer both the main research question and the hypotheses from the previous part. The chapter starts by explaining the design of the study. The second part of this chapter presents the analysis plan used to test the hypotheses and arrive at conclusions.
3.1 Design
This study aims to investigate how prices are judged in terms of perceived unfairness when consumers are faced with individual price discrimination practices. Several prices for a product are used in combination with several rationales given by a firm explaining why there is a price difference between two consumers. In order to do this set up a within-subjects 2X3 (price level X rationale given by firm) online experiment. Since this research has a within subjects design all respondents filled in all possible cases of manipulation. In order to combat testing effects and fatigue effects we show the scenarios in an order where no same rationale is repeated one after another.
In scenario 1 and 4 the rationale for why there is a price difference is absent. Respondents are not given an explanation of why they pay a higher price than other consumers, this will serve as a benchmark scenario in which there is either a 15% or 30% price difference. Next two different rationales and their effect on perceived unfairness are investigated. In rationale 1 (scenario 2 and 5) the participant was informed that the other (reference) consumer received a special discount because he frequently buys this good. Rationale 2 (scenario 3 and 6) informs participants that the reference consumers paid less because of his consumer characteristics or surfing behavior. This indicates that certain consumers may be more valuable to firms than others. Out of the three different rationales rationale 2 is the more extreme example of individual level price discrimination.
No rationale (0) Rationale 1 Rationale 2
Price level 15% more Scenario 1 Scenario 2 Scenario 3
Price level 30% more Scenario 4 Scenario 5 Scenario 6
As a product category a return airplane ticket from Amsterdam to Barcelona was used. Airplane tickets are frequently bought online and it is a good in which consumers invest some time searching before purchasing. We use this category since more elaborate search is likely to lead to more pronounced reactions to price differences as consumers spend time evaluating the different offers. Also in the travel business dynamic pricing strategies have been used for some time now which allows for a more realistic response (Weisstein, Monroe and Kukar-Kinney) The average retail price for the ticket was around 140 Euro at the time of the research. procedure In order to represent a real purchasing situation a picture of the cheaptickets.nl web shop was shown in the beginning of the survey. Cheaptickets is one of the more known online retailers of flight tickets for different airline companies in the Netherlands.
3.2 Procedure
Participants were directed to a web based survey which was delivered via the Qualtrics software. The procedure involved exposing consumers to instances of dynamic pricing, specifically individual level price discrimination. When starting the survey participants were informed of the set-up of this study and are introduced to the web shop of Cheaptcickets with a picture of their website. The participants are also informed they will be put in a after purchase situation of an airplane ticket. Respondents were gathered mostly through Facebook by offering them a chance of winning 25 euros in a raffle upon completion of the survey. First stage
Once participants had been briefed about the set-up of this study the next phase of the survey measured the independent variables. By using a 1-7 Likert scale the survey measured all the non-manipulation variables such as price sensitivity, product class purchase frequency and consumer trust in relationship with Cheaptickets. Consumers were also asked what they would be willing to spend on a return ticket from Amsterdam to Barcelona which serves as their reference price.
Manipulation stage
As part of the experiment prices were varied so that the reference consumer had to pay either 15% or 30% less than the respondent. In scenarios 2,3,5 and 6 , respondents were shown a rationale by Cheaptickets indicating why the reference consumers paid 15% or 30% less. These prices were based on the assumption that consumers originally had to pay 140 Euros for their ticket, and a 15% or 30% decrease leads to the reference consumers price (119 & 98 Euro) . For each of the six scenarios consumers could state the perceived price unfairness and repurchase intention on a 1-7 Likert scale. After completion of the six scenarios demographic questions were asked at the end and respondents had the options of entering their e-mail address to participate in the 25 euro raffle.
3.3 Measurement of scales
Several scales were used in order to get reliable estimates for trust in cheaptickets.nl, consumer price sensitivity and consumer transactional involvement in the flight ticket category. We recorded participants response to the scale questions on a 7-point Likert scale.
Consumer trust
(Garbarino and Lee 2003)
Overall I trust Cheaptickets.nl.
Cheaptickets.nl can be trusted more than the average Internet retailer.
Consumer price sensitivity
(Sinha and Batra 1999)
I tend to buy the lowest-priced flight ticket that will fit my needs. When buying a flight ticket I look for the cheapest brand available. When it comes to buying flight tickets I rely heavily on price. Price is the most important factor when I am choosing a flight ticket
Consumer (transactional) involvement
(Laurent and Kapfeler1985)
I Choose which flight ticket I buy very carefully Which flight ticket I buy matters a lot to me
Choosing which flight ticket to buy is an important decision for me
Table 2 Trust, Price sensitivity and Involvement scales
3.4 Analysis plan – Data structure
Since this research shows six scenarios to a single consumer a total of six responses for the dependent variables unfairness and repurchase intention are recorded per respondent. Data is structured in the long design where we list six observational lines vertically for each respondent. By using this structure we have what is called a repeated measurement design, where we list multiple observations on the dependent variable (Vogt 1993). In total we end up with 6 lines of observations per respondent. The manipulated variables price difference (15% or 30%) and rationale (1, 2 and 3) differ from each observational line as do the scores on the dependent variables (unfairness). The independent variables that were not manipulated are consumer specific and thus do not vary between the observations per respondent.
3.5 Analysis plan – Model specification
Since the measurements are taken from one respondent six times (one for each scenario) the measurements are correlated per individual (Littell, Pendergast and Natarajan 2000). Ordinary regression cannot be used due to the correlation residual error (serial correlation), this would result in significance values that are falsely estimated too high. In our cases data is correlated only for the same respondent but not between respondents. In order to overcome this obstacle a mixed linear model command in SPSS is used which allows for selection of covariance matrices. We specify a model that accounts for the fact that observations are nested within individuals by allowing for the covariance matrix to take the best fitting shape. This mixed approach handles repeated measurement data by allowing to specify a respondent ID for each respondent and a variable indicating how many repeated measures were taken (scenarios 1 through 6). This solves the problem of correlated observations for our respondents as the source of variation is modeled by structuring the covariance matrix.
4
RESULTS
The results chapter starts by describing the respondent population which was collected for this research. The second part contains the validation of the scales that were used to record the measurements in the experiment. Next the descriptive information about the distribution of the dependent variable (perceived price unfairness) is given. The final part of this chapter answers the hypotheses based on the model estimations and finishes by summarizing the results of this study.
4.1 Respondent population
Data was collected over a period of two weeks during which 234 people started and 182 respondents finished the survey resulting in a completion rate of 77,8%. Descriptive information on the respondents are given below in table 3.
Age The average age was 23,80 years with the median age being 23. The standard deviation for age was 4,96 years. 79,5% of the respondents had an age of 21 to 25 years.
Gender The sample consisted of 69 males (37,9%) and 113 females (62,1%).
Education 86 (47,3%) of respondents had or was studying at bachelor’s degree level, 88 (48,4%) respondents had or was studying for a master’s degree level and the remaining8 (4,4%) respondents had or was studying for a MBO or high school diploma.
Occupation 99 (54,4%) of respondents identified as students , 65 (35,7%) were students with a part
time job. 15 (8,2%) respondents were working either full or part time. 3 Respondents (1,6%) indicated to be neither student nor to be working.
Income 76 (41,8%) of respondents had between 0 to 500 euro income per month, 65 (35,7%) had between 501 to 1000 euros of income per month. 26 (14,3%) had an income of 1001 to 1500 per month. 9 (4,9%) respondents had an income between 1501 and 2000 and 6 (3,2%) of people who participated had an income higher than 2001 euro per month.
Table 3 Respondent demographic information
4.2 Scale validation
Results of the item scores per scale can be found in table 4. The internal consistency for all three scales is acceptable with the 2-item scale for trust showing the lowest Cronbach’s alpha at 0,698. Since this is close to 0,7 we consider this to be appropriate for analysis. For the multi item scale of price sensitivity removing any of the items from the scale would not change the score by a large degree and thus we conclude we can use all four items. The items for consumer involvement show a reasonable degree of internal consistency, dropping any of the three items would not increase the consistency by a large degree.
In order to compute the mean score of a consumer on a scale the sum of scores for all items belonging to a scale is taken and divided by the number of items. This results in a mean score per respondent on the scale. These scores are subsequently used in the analysis part to estimate the effect these scales have on
unfairness perceptions. A score of 7 on the scale item indicates a maximum score and a 1 indicates a minimum score. Scores below 4 would indicate disagreement with the statements. Based on the average score (rounded to one decimal) respondents on average have a medium level (4,7) of trust in Cheaptickets.nl and are quite price sensitive when purchasing flight tickets scoring a 5,9 on the scale. Finally the average score for transactional involvement for purchasing a flight ticket scored 5,4.
4.3 Perceived price unfairness & Repurchase intention
The mean unfairness response is shown below for each scenario in table 5 repurchase intention is shown in figure 1. Scenarios one to three were manipulated at 15% price difference (119 versus 140 Euro) and scenarios four to six are responses at manipulated 30% price difference (98 versus 140 Euro). In scenarios one and four consumers are not given a rationale for this price discrepancy, scenario two and five present a rationale in which the other consumer frequently buys from Cheaptickets. In scenarios five and six respondents are told that price differences are due to individual characteristics representing the most extreme case of first degree price discrimination.
Results show that the lowest perceived unfairness and the highest repurchase intention occurs in scenario 2 with the following being scenario 5. Both these scenarios informed respondents that price differences between
their flight tickets and the one purchased by their friend was due to frequent buyer discounts. The perceived price unfairness is as expected slightly higher in the 30% price difference scenarios compared to their 15% difference counterpart. Scenario 3 and 5 induced the highest levels of perceived price unfairness at 5,86 and 5,98 respectively. This is
reflected also in the reduced purchase intention for these scenarios which lies below that of the other scenarios. We note already that the standard deviations for scenario two and five
(rationale 2, frequent buyer discount) are both larger compared to the other scenarios. This indicates that consumer response to the frequent buyer discount is less homogenous than the response to other reasons for price differences. Appendix two shows the distribution for price unfairness responses for both scenario two and five.
Table 5 Mean perceived price unfairness 4.4 Residual error covariance
A unstructured covariance matrix was selected in order to identify the covariance between the different scenarios (repeated measures). Table 7 shows see that there are differences in the residual covariance between the scenarios. Scenario 2 and 5 are the scenarios in which consumers are told that the price difference is due to frequent buyer discount for the reference consumer. These scenarios deviate from the other scenarios in which no rationale is given or where the price difference is due to consumer characteristics. Scenarios 2 and 5 also showed higher standard deviations (1,491 & 1,691) on the price unfairness response compared to the other scenarios. This indicates that consumers perception of this rationale is not as uniform as with the other rationales. There is more of a split between people that do accept discounts due to frequent purchasing and those who do not. This could be explained as frequent buyer discounts are practiced widely as a marketing or relationship marketing instrument. We list the histogram of price unfairness responses in appendix 1 for clarification.
Scenario Mean N Std. Deviation
Table 6 Unstructured covariance matrix
These findings indicate that a latent class analysis could produce distinct classes in which consumers are split based on how they react to the different rationales given for individual price discrimination strategies.
4.5 Main effect of perceived price unfairness
In line with previous authors we find that unfairness can lead to negative consequences, in our case reduced repurchase intention. The model below is run in SPSS via the mixed linear command. The model has 1092 observations from 182 respondents. An unstructured covariance matrix is selected based on the lowest BIC score. Unfairness has in line with our expectation and previous literature a negative impact (Estimate -0,40, P<0.00) on repurchase intention for Cheaptickets.nl.
Table 7 Effect of unfairness on repurchase intention Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 Scenario 1 1,624505 ,490876 ,623496 1,064184 ,735333 ,632589 Scenario 2 ,490876 2,175496 ,441075 ,532012 1,604742 ,371592 Scenario 3 ,623496 ,441075 1,524482 ,807754 ,710788 ,922327 Scenario 4 1,064184 ,532012 ,807754 1,705407 ,934046 ,885552 Scenario 5 ,735333 1,604742 ,710788 ,934046 2,568696 ,752512 Scenario 6 ,632589 ,371592 ,922327 ,885552 ,752512 1,713421
Parameter Estimate Std. Error DF T value Sig.
Intercept 5,705111 ,167947 634,529 33,970 ,000
4.6 Effect of independent variables on perceived price unfairness
Table 8 shows the estimates for the effect of the independent variables on price unfairness. The parameter estimates are based on the partial likelihood approach. The model selection was based on the information criteria with the model below scoring 3505,904 on BIC and a -2LL of 3359,717. Several more restricted covariance matrices were also specified but the results for the unstructured model were the best.
Price difference & moderation effects
The effect of price difference is positive (0,31, P<0,00) so that the perceived price unfairness goes up when there is more difference in the price between what the reference consumer paid and the price that was shown to the respondent (compared to the reference category of 15%). This is in line with our hypothesis indicating that consumers react negatively to increasing differences in price due to dynamic pricing strategies. Interaction effects between the price difference with price sensitivity internal reference price were tested in a separate model but returned non-significant results, results of this model are added as in appendix 2.
Effect of rationale
Table 8 Parameter estimates
Parameter Estimate Std. Error DF T value Significance
Consumer characteristics
Gender and age do not have an effect on the perceived price unfairness. Education has a significant negative effect (at 10%) where compared to the high education group, a low education increases the price unfairness reaction by 0,87. Occupations and income did not show any effect on perceived unfairness neither did consumer trust in the relationship with Cheaptickets did not show any effect. The price sensitivity scale was significant at P=0,003 with a positive effect of 0,25 on perceived unfairness, indicating that price sensitive consumers perceive more price unfairness. Transactional involvement was significant at the 10% level with P=0,82 and a positive effect of 0,12 on perceived price unfairness. Purchase frequency was non-significant both for the product class and for Cheaptickets.nl specifically. Furthermore also the internal reference price showed no significant effect.
4.7 Latent class analysis
In order to analyze if there are distinct groups (latent classes) of consumers who react different to dynamic pricing a separate latent class model is used. We use LatentGOLD to specify a LatentGOLD regression model. Similar to the mixed model approach in SPSS we specify a respondent ID to identify repeated measurements for a single respondent. We specify the model with the rationale (1 through 3) and the price difference (15% and 30%) as predictors and the other independent variables as covariates.
A three class solution was found the be the best based on the lowest scores on the information criteria shown in table 9. The three class solution reported different class sizes where class one was the largest at around 51% of the respondent population. Class two incorporates approximately 30% and class three approximately 19% of the population.
Variables Class 1 Class 2 Class 3 Wald P-value Wald(=) P-value Mean Std.dev.
price difference 30% 0,16 0,42 -0,03 35,02 0,00 19,18 0,00 0,21 0,16 15% -0,16 -0,42 0,03 -0,21 0,16 Rationale 1 0,06 -0,04 -0,02 107,16 0,00 38,27 0,00 0,02 0,05 2 -0,71 -0,93 -0,12 -0,67 0,28 3 0,65 0,97 0,14 0,65 0,28 COVARIATES Intercept -0,88 -4,61 5,50 2,53 0,28 Reputation -0,06 -0,01 0,07 0,14 0,93 Trust scale 0,17 0,17 -0,34 2,71 0,26 Cons. Involvement 0,14 -0,04 -0,10 1,04 0,59
Purch. Freq. class -0,07 0,05 0,02 0,74 0,69
Purch. Freq. C.T. 0,19 -0,21 0,01 2,04 0,36 Reference price 0,00 0,00 -0,01 2,58 0,28 Age 0,00 0,04 -0,04 0,72 0,70 Gender Male 1 -0,20 -0,17 0,37 3,93 0,14 Female 2 0,20 0,17 -0,37 Education Low 0,75 1,13 -1,89 0,48 0,79 High -0,75 -1,13 1,89 Income Low 0,96 -1,74 0,79 5,53 0,24 Medium 0,02 -1,39 1,37 High -0,98 3,13 -2,16 Occupation 1 -0,45 1,20 -0,75 4,76 0,78 2 -0,49 1,27 -0,79 3 4,35 -0,94 -3,41 4 -0,91 0,21 0,71 5 -2,50 -1,74 4,24 Price sensitivity 0,02 0,77 -0,80 14,30 0,00
Results from table 10 show the estimates for each class predicted by the latent class analysis. We again find a significant (P<0,00) effect of the price difference on unfairness perceptions. Class one has a mean price unfairness response across all scenarios of 5,39 and a positive estimate of 0,16 (P<0,00) indicating that they react negatively to the 30% difference in price compared to 15%. Class two reacts the strongest with an estimate of 0,42 (P<0,00) for an increasing price difference, price sensitivity also shows an estimate of 0,77 indicating this group is likely to contain the most price sensitive consumers. The mean unfairness for class two is also the high with 6,38 mean perceived unfairness. Between the classes class three shows the weakest effect indicating that this group is not price sensitive and does not react strongly to increasing price differences. This is supported by the price sensitivity parameter with an estimate of -0,03 (P<0,00) for class three. This would mean they actually react less negatively to the 30% scenario compared to the 15% scenario. The value for mean perceived price unfairness from table 11 is also low with 3,92 on average.
We also find significant effects of the rationales given for the price differences. Rationale 1, the benchmark scenario where consumers were not given any explanation for the different prices offered to the two consumers shoed mixed results. Class one reacted positively to this scenario, class two and three showed negative responses (P<0,00). Class one reacts moderately strong to the different rationales, they prefer the frequent buyer discount as an explanation. Class two shows the strongest reactions across all rationales with the largest range. Similar to class one they react most preferably to the frequent buyer explanation for price differences. These consumers react strongly negative with a 0,97 increase in perceived price unfairness (P<0,00) for rationale three. Class three similar to price differences reacts only weakly to different explanations given for why there are price discrepancies.
Variables Class 1 Class 2 Class 3
Unfairness 5,39 6,38 3,92
Reputation 5,15 5,21 4,84
Trust scale 4,82 4,83 4,37
Cons. Involvement 5,50 5,34 5,19
Purch. Freq. class 3,93 4,08 4,17
Purch. Freq. C.T. 1,98 1,72 1,97 Reference price 144,72 130,68 115,76 Age 23,30 23,95 24,24 Gender Male 0,29 0,44 0,53 Female 0,71 0,56 0,47 Education Low 0,02 0,07 0,03 High 0,98 0,93 0,97 Income Low 0,83 0,72 0,74 Medium 0,14 0,22 0,26 High 0,03 0,05 0,00 Occupation 1 0,56 0,52 0,55 2 0,33 0,43 0,34 3 0,09 0,02 0,00 4 0,01 0,02 0,09 5 0,01 0,02 0,03 Price sensitivity 5,84 6,31 5,49
Table 11 Mean values per latent class
4.8 Hypothesis rejection
No moderation effect was found for internal reference price or for consumer price sensitivity on the strength of price difference. Furthermore we find that giving a rationale can both reduce and increase perceived price unfairness perceptions. Giving discounts for frequent buying is more acceptable to consumers than not giving any reasoning for a difference in the price offered to two consumers. Out of the three scenarios settings prices based on either consumer characteristics or browsing behavior is seen as most unfair by consumers.
Hypothesis P value Result
H1 = Perceived price unfairness has a negative effect on repurchase intention
0,00 Supported
H2 = Price difference has a positive effect on perceived price unfairness
0,00 Supported
H3 = Firm reputation has negative effect on perceived price unfairness
>0,00 Not supported
H4 = Internal reference price makes the relationship of price difference on perceived price unfairness weaker.
>0,10 Not supported
H5 = Price sensitivity makes the relationship of price difference on perceived price unfairness stronger.
Direct effect <0,05 Direct effect supported Interaction >0,10 Moderation not supported H6a = Product class involvement has positive effect on the perceived
price unfairness
,082 Supported at
10% level H6b = Purchase frequency has a positive effect on perceived price
unfairness
>0,10 Not supported
H7 = Trust in relationship has negative effect on perceived price unfairness
>0,10 Not supported
5
CONCLUSION
Consistent with the literature about price fairness we have found that consumer acceptance of price discrimination tactics is still limited (Haws and Bearden 2006). Results of the manipulated experiment with 182 respondents supports the effect of several variables on perceived price unfairness perception. In line with previous research we find that price difference and the firm’s rationale that is given to consumers can have a significant effect on perceived price unfairness. Different rationales are subject to different interpretation, not giving any explanation is perceived as more unfair than frequent buyer discounts to the reference consumers. Price discrimination based on consumer characteristics is perceived as most unfair. Consumers own price sensitivity showed a direct effect on perceived price unfairness. We also find a potential effect for transactional consumer involvement which is significant at the 10% level. Further analysis is needed to show what the role of involvement is in price fairness perceptions. None of the consumer characteristics reported any relationship at the 5% level. However education was significant at the 10% level indicating that lower educated consumers react more negatively to individual price discrimination situations. Contrary to expectation the internal reference price did not have any moderating or direct effect on perceived price unfairness. Consumers trust and the inferred firm reputation of Cheaptickets.nl also did not report any effect and thus we cannot provide evidence that trust can function as a buffer to perceived price unfairness. Also neither purchase frequency for product class (flight tickets) or firm (Cheaptickets.nl) showed a significant response on price unfairness.
context and providing explanations for consumers who are faced with different prices firms gain the ability to profitably target consumers by making using of different willingness to pay levels. Most importantly by controlling for unfairness reactions firms can evade negative responses such as complaints and reduced purchase intention which struck Amazon (Adamy 2000). While this research was limited in scope it is to the best of my knowledge the first application of a latent class solution to create distinct consumer groups and show that managers can segment their consumers based on their response to dynamic pricing schemes, in our case individual price discrimination.
5.1 Discussion
6
APPENDIX
APPENDIX 1 PRICE UNFAIRNESS DISTRIBUTIONS
Figure 3 Unfairness response histogram (scenario 2)
APPENDIX 2 MODERATION EFFECTS
Estimates of Fixed Effectsa
APPENDIX 3 SAMPLE SCENARIO TEXT
---
Please read the scenario below and then answer the questions below.
You are shopping for a return flight ticket from Amsterdam to Barcelona on the web shop of Cheaptickets. After searching some time you find a ticket that suits your needs and purchase it for a price of 140 Euro.
By accident you learn that a friend of yours is also going to Barcelona and he bought the same ticket you have. The ticket is for the exact same flight and same airline. Your friend also bought his ticket at the same time as you did from cheaptickets.nl. When you ask him how much he paid you find out that your friend had to pay (98 or 119) Euro for the ticket instead of 140 Euro which you had to pay.
You call Cheaptickets about the price difference and they tell you:
1. (“Because your friend frequently buys from cheaptickets.nl he is given a better price for this ticket”.)
2. ('The price difference is because of individual differences between you and your friend. These differences could be due to online surfing behavior, purchasing behavior or characteristics such as age, income and others.”.)
7
REFERENCES
Adams, J.S. (1965), “Inequity in Social Exchange,” Advances in
Experimental Social Psychology, (2)267-299
Adamy, Janet (2000), “E-Tailer Price Tailoring May Be Wave of Future,” Chicago Tribune, (September 25), 4
Bolton Lisa E, and Alba J.W. (2006), “Price Fairness: Good and Service Differences and the Role of Vendor Costs”, Journal of Consumer Research, (33)258-265.
Bolton, Lisa E, Hean Tat Keh, and Joseph W. Alba (2010), “How Do Price Fairness Perceptions Differ Across Culture?”, Journal of Marketing Research, (47)564-576
Bolton, Lisa E., Luk Warlop, and Joseph W. Alba (2003), “Consumer
Perceptions of Price (Un)Fairness,” Journal of Consumer Research, (29)474-491
Campbell, Margaret C. (1999), “Perceptions of Price Unfairness: Antecedents and Consequences,” Journal of Marketing Research, (36)187–99
Carroll, K and Coates, D (1999), “Teaching price discriminations: Some clarification”,
Southern Economic Journal, (66)466-480
Cox, Jennifer L. (2001), “Can Differential Prices Be Fair?” Journal of Product and Brand
Management, (50)264–75
Dickson, Peter R. And Alan G. Sawyer. (1990), "The Price Knowledge and Search of Supermarket Shoppers," Journal of Marketing, (54)42-53
Feinberg F, M, Krishna, A and Zhang, Z,. J. (2002), “Do We Care What Others Get? A Behaviorist Approach to Targeted Promotions”, Journal of marketing research, (39)277-291 Finkel, Norman J. (2001), “Not Fair! The Typology of Commonsense Unfairness.” Washington, DC: American Psychological Association
Garbarino, Ellen and Olivia F. Lee (2003), “Dynamic Pricing in Internet Retail: Effects on Consumer Trust,” Psychology & Marketing, (20)495–513
Grewal, Dhruv, David Hardesty, and Gopalkrishnan Iyer (2004), “The Effects of Buyer Identification and Purchase Timing on Consumers’ Perceptions of Trust, Price Fairness, and Repurchase Intentions,” Journal of Interactive Marketing, (18)87-100
Haws, Kelly L. and William O. Bearden (2006), “Dynamic Pricing and Consumer Fairness Perceptions,” Journal of Consumer
Research, (33)304–311
Homans, G.C. (1961), Social Behavior: Its Elementary Forms. New York: Harcourt, Brace & World.
Kahneman, Daniel, Jack L. Knetsch, and Richard Thaler (1986a), “Fairness and the Assumptions of Economics,” Journal of Business, (59)285-300
Kahneman, Daniel, Jack L. Knetsch, and Richard Thaler (1986b), “Fairness as a Constraint on Profit Seeking Entitlements in the Market,” The American
Economic Review, (76)728–741
Kalyanaram G, Winer, R, S, (1995), “Emperical generalizations from price reference research”, Marketing Science, (14)161-169
Kumar, V., Karande, K, Reinartz W (1998), “The Impact of Internal and External Reference Prices on Brand Choice: The Moderating Role of Contextual Variables”, Journal of Retailing, (74)401-426
Laurent, G. and Kapferer, J.N., (1985), “Measuring consumer involvement profiles.” Journal
of Marketing Research, (22)41–53
Lichtenstein, D.R., Ridgway, N.M., Netemeyer, R.G., (1993), “Price perceptions and consumer shopping behavior: A field study.”, Journal of Marketing Research, (30)234-245 Litell, R C,.Pendergast J and Natarajan R (2000), “Modelling covariance structure in the analysis of repeated measures data”, Statistics in Medicine, (19)1793-1819
Martins, Marielza (1995), “An Experimental Investigation of the Effects of Perceived Price Fairness on Perceptions of Sacrifice and Value,” doctoral dissertation, Department of Business Administration, University of Illinois.
Maxwell, Sarah (1995), “What Makes a Price Increase Seem ‘Fair’?” Pricing Strategy &
Practice, (4)21–27
Maxwell, Sarah, (1999), “The Social Norms of Discrete Consumer Exchange: Classification and Quantification,” American Journal of Economics and Sociology, (58)999–1018
Mayer, Roger C., James H. Davis, and F. David Schoorman (1995), “An Integrative Model of Organizational Trust,” Academy of Management Review, (20)709–734
Nye, P, and Maxwell, N (1999), “Less Pain, Some Gain: The Effects of Priming Fairness in Price Negotiations,” Psychology & Marketing, (16)545-62
Ramani, G., V. Kumar (2008), “Interaction Orientation and Firm Performance”, Journal of
Marketing, (72)27-45
Sahay, A (2007), “How to Reap Higher Profits With Dynamic Pricing”, MIT Sloan
Management Review, (48)53-60
Sanburn, J. (2012). Delta appeared to overcharge frequent flyers for weeks-was that legal? Retrieved from http://moneyland.time.com/2014/06/19/delta-overcharged-frequent-flyers-for-weeks-wasthat-legal/
Sinha, I, Batra, R, (1999), “The effect of consumer price consciousness on private label purchase”, International Journal of Research in Marketing, 16)237-251
Sirdeshmukh, Deepak, Jagdip Singh, and Barry Sabol (2002), “Consumer Trust, Value, and Loyalty in Relational Exchanges,” Journal of Marketing, (66)15-37
Vaidyanathan, Rajiv and Praveen Aggarwal (2003), “Who Is the Fairest of Them All? An Attributional Approach to Price Fairness Perceptions,” Journal of Business Research, (56)453-463
Varki S,. Wong S (2003), “Consumer involvement in relationship marketing of services”,
Journal of Service Research, (6)83-91
Vogt, W. P. 1993. Dictionary of statistics and methodology: A nontechnical guide for the social sciences. Newbury Park, CA: Sage.
Weisstein, Fei L., Kent B. Monroe and Monika Kukar-Kinney (2014), “Effects of price framing on consumers’ perceptions of online dynamic pricing practices” Journal of the
Academy of Marketing Science, (41)501-514
