Perceived Price Fairness: a New Look At an Old Construct

Marielza Martins, University of Illinois at Urbana-Champaign
Kent B. Monroe, University of Illinois at Urbana-Champaign
ABSTRACT - The value of a product is postulated by Monroe (1990) to be a tradeoff between the perceived benefits, or quality, offered by the product, and the sacrifice, both monetary and non-monetary, perceived as necessary to acquire it. The price-quality relationship research stream has identified brand, level of advertising and store image as variables affecting perceived product quality (Dodds et al. 1991), but so far no variable has been shown to moderate perceived sacrifice assessments. This paper suggests that perception of price fairness, a concept derived from equity research, may be a variable moderating perceived sacrifice and perceived product value, and therefore willingness to buy.
[ to cite ]:
Marielza Martins and Kent B. Monroe (1994) ,"Perceived Price Fairness: a New Look At an Old Construct", in NA - Advances in Consumer Research Volume 21, eds. Chris T. Allen and Deborah Roedder John, Provo, UT : Association for Consumer Research, Pages: 75-78.

Advances in Consumer Research Volume 21, 1994      Pages 75-78

PERCEIVED PRICE FAIRNESS: A NEW LOOK AT AN OLD CONSTRUCT

Marielza Martins, University of Illinois at Urbana-Champaign

Kent B. Monroe, University of Illinois at Urbana-Champaign

ABSTRACT -

The value of a product is postulated by Monroe (1990) to be a tradeoff between the perceived benefits, or quality, offered by the product, and the sacrifice, both monetary and non-monetary, perceived as necessary to acquire it. The price-quality relationship research stream has identified brand, level of advertising and store image as variables affecting perceived product quality (Dodds et al. 1991), but so far no variable has been shown to moderate perceived sacrifice assessments. This paper suggests that perception of price fairness, a concept derived from equity research, may be a variable moderating perceived sacrifice and perceived product value, and therefore willingness to buy.

INTRODUCTION

Pricing research has traditionally viewed consumer judgments of price fairness in terms of consumers' relationships with sellers. Conspicuously absent from the present formulation of perceived price fairness is the notion that lateral relationships between customers may be another source of such perceptions. However, Monroe and Petroshius (1981) posit that price perception is essentially a comparative process. Since consumers do share product information, as evidenced by "word-of-mouth" communications research, it is likely that product price will also be discussed and compared.

Firms increasingly rely on the use of various forms of price promotion, such as off-invoice discounts, rebates, coupons, volume buying incentives, discounts to members of particular organizations, or preferred customer cards. Moreover, while some promotions may be available to all customers, others may be limited to consumers possessing particular characteristics. For instance, handicapped passengers may be allowed to purchase bus tokens at a special low price not available to other customers. As a consequence, many sales may result in different net prices being charged different customers. These practices are already so widespread that Marn and Rosiello (1992, p.87) claim that "at any point in time, no item sells at exactly the same pocket price to all customers."

Such price differences may lead consumers to engage in inter-buyer price comparisons that generate perceptions of price fairness. The objective of this paper is to describe how this neglected aspect of the perceived price fairness construct may ultimately affect perceptions of monetary sacrifice and value, and therefore, willingness to buy.

Price Fairness and the Principle of Dual Entitlements

The pricing literature in consumer behavior recognizes that customers may respond differently to prices than the traditional economic approach, embodied in the downward sloping demand curve, proposes they do. For instance, pricing research has examined several constructs that are related to price perceptions, such as reference prices and the price-quality relationship.

Among such constructs, researchers have advanced the notion that price acceptability is affected by perceptions of the equity, or fairness, of market prices. According to Kamen and Toman (1970), "consumers have some preconceived ideas about what is a fair price for a given item," and are unwilling to spend more than that amount for the particular item.

Underlying this notion is transaction utility theory, which posits that consumers derive both acquisition and transaction utility from their dealings in the marketplace. While acquisition utility reflects the utility derived from possessing the product, transaction utility reflects the difference between the "fair" price consumers expect to pay and the actual market price encountered. This difference may be positive, giving buyers an extra incentive to complete the purchase process, or negative, dampening consumers' willingness to buy (Thaler 1985).

The Principle of Dual Entitlements

Kahneman et al. (1986) show that, indeed, consumers do form perceptions of the fairness of market prices. Furthermore, these individual perceptions may be based on community norms of fairness, reflected by the principle of dual entitlements. On one hand, this principle suggests that consumers may accept price increases they perceive as being justified by rising sellers' costs and resist price increases that are perceived as resulting in higher profits for sellers. In other words, buyers may see as fair the practice of passing cost increases on to consumers, while the practice of increasing profits at the expense of consumers may be seen as unfairly exploitative. On the other hand, consumers may perceive higher levels of sellers' profits resulting from cost reductions as fair. In other words, sellers may not need to share savings resulting from cost decreases with buyers. As a result of the dual entitlements principle, "it is fair for prices and profits to only ever increase, because it is consistent with this norm of fairness for sellers to pass on cost increases and not cost decreases" (Kalapurakal et al. 1991, p.789).

Equity Theory

The principle of dual entitlements may be an outcome of the compensatory function of prices (Lynn 1990), which is explained in terms of equity theory. Equity theory is a social comparison theory in which individuals evaluate the ratio of the investments they make to a particular exchange to the profits they derive from it, relative to the investments and profits allocated to their exchange partners. Equity theory posits that, for an equitable exchange relationship to exist, the parties involved have to obtain equal ratios of perceived profits, or gains, to perceived investments, or losses. Moreover, according to Homans (1961), equity needs not necessarily be concerned with the outcomes achieved by parties directly involved in an exchange. Instead, indirect exchange partners, such as two customers buying from the same seller, would also have a right to expect that their common direct partner, the seller, would apportion their individual outcomes by following the rule of equal gain-loss ratios.

Proposition 1: Buyers may take into account the prices paid by other customers for the same products they acquire.

Whenever the ratio comparison reveals unequal gain-loss ratios being allocated to the parties involved in an exchange, an inequitable exchange exists. While the party with the relatively larger gain-loss ratio is perceived as receiving unfair advantages, the party with the relatively smaller gain-loss ratio is perceived as receiving unfairly disadvantageous terms (Adams 1965).

Following the postulates of cognitive dissonance theory, or the "existence of nonfitting relations among cognitions" (Festinger 1957, p.3), equity theory further suggests that inequity results in feelings of distress and tension to the parties in an inequitable exchange relationship. These tension feelings, which Adams (1965) posited to be proportional to the magnitude of the inequity being experienced, would motivate the parties to an inequitable exchange to restore equitable terms. While disadvantageous inequity, a loss, is posited to result in anger on the part of the short-changed individual, advantageous inequity, a gain, leads to guilt on the part of the benefiting individual. According to Lynn (1990), price may be the mechanism utilized by exchange partners to restore equity to inequitable market exchanges.

However, Adams (1965, p.274) suggested that equity "must fail of realization to a greater extent when it is favorable to an individual before he reacts than when it is to his disadvantage." Therefore, a perceived disadvantageous inequity, or loss, elicits greater motivation to reduce inequity than a perceived advantageous inequity, or gain, of the same magnitude. In fact, there is little empirical evidence supporting the fact that feelings of guilt would also lead to equity restoration attempts (Deutsch 1985).

In the pricing context, perceptions of price fairness, like perceptions of exchange fairness, depend on the gain-loss ratio of exchange partners, where the gain, from the consumer's perspective, may be defined as the product to be received, and the loss, as the price to be paid. Perceived disadvantageous price inequity may be experienced by a customer who either pays a higher price and receives a product equivalent to that received by other customers, or who pays the same price but receives less product, either in terms of quantity or quality. Perceived advantageous price inequity, on the other hand, may result from either paying the same price and receiving more product than others, or paying a lower price and receiving an equivalent product.

Prospect Theory

Tversky and Kahneman (1979) propose that perceptions depend on the contextual framing: there is an asymmetry in the way consumers respond to losses vis-a-vis the way they respond to gains. A loss generates a larger response, in absolute terms, than a gain of the same magnitude, and is posited to be more salient in individuals' minds. As a result, disadvantageous inequity, a loss, is likely to be perceived more negatively than advantageous inequity, a gain, is perceived positively, even when of equivalent magnitude. Therefore:

Proposition 2: A perceived disadvantageous price inequity likely will generate a more unfavorable customer response than a perceived advantageous price inequity of the same magnitude generates a favorable customer response.

In other words, when two customers compare the prices they are offered for a particular product, the customer who is offered the higher price will experience a greater decrease in his/hers willingness to buy the product than the customer who is offered the lower price will experience an increase in willingness to buy the product.

EXTENDING THE PRICE-QUALITY RELATIONSHIP TO ACCOUNT FOR PERCEIVED PRICE FAIRNESS

The Price-Quality Relationship

Product quality is one of the most important concepts in marketing strategy, as it is believed to be positively related to competitive advantage (Schnaars 1991). Buyers judge product quality in terms of overall product superiority as compared to substitute products in their evoked sets (Zeithaml 1988). To perform this judgment task, buyers need to evaluate product attributes.

Attributes can be either intrinsic, i.e., those that cannot be changed without changing product composition, such as flavor, or extrinsic, i.e., those that, when changed, do not alter product composition, such as price. Furthermore, attributes can be classified as 1) search attributes, those attributes for which quality can be evaluated before purchase; 2) experience attributes, those that can only result in a quality assessment after purchase and use; and finally, 3) credence attributes, those for which no quality evaluation can be made by the uninformed buyer, who therefore has to either rely on someone else's evaluation to assess product quality (Steenkamp 1989), or utilize other attributes as indicators of the quality level reflected by the credence attribute.

Buyers face some constraints in their evaluations of intrinsic attributes. First, different types of intrinsic attributes moderate the quality assessment process, and only search attributes lead to a quality assessment prior to purchase. Second, buyers possess limited cognitive abilities, and therefore, even search attributes may not lead to a quality assessment before purchase if buyers are overloaded with information. Finally, the search and evaluation process entails a cost in terms of time, money and effort spent, and therefore buyers may perceive the cost of searching and evaluating new product attributes as too high relative to the perceived benefits derived from this process. As a result, several products and attributes may not even be taken into consideration.

Since not all intrinsic product attributes lead to a quality assessment before purchase, buyers may also rely on extrinsic attributes, which are not directly related to product performance, as quality indicators. Buyers may also choose to rely on extrinsic attributes as a summary measure of product quality level so as to escape information overload or to help make an assessment. Therefore, extrinsic attributes such as price, store name, brand name or advertising intensity may have an impact on buyers' assessments of product quality through their role as quality signals.

Monroe (1990) suggests that buyers internalize the price attribute in terms of perceived price, which may influence perceived product quality and perceived product sacrifice. The ensuing quality-sacrifice comparison results in an assessment of product value. When perceived value is positive, buyers are more likely to purchase the product, otherwise they may continue to search or refrain from buying.

It is interesting to note that, so far, no variable has been identified in the pricing literature as affecting buyers' perceptions of sacrifice, although perceptions of price fairness seem to play such a role in buyer-seller relationships. Buyers seem to compare sellers' costs to the price compensation they are entitled to, resisting price increases perceived as unfair by withholding product demand, i.e., by decreasing their willingness to buy the product, while allowing price increases perceived as fair.

Competitive Upgrade Pricing

Recent events in the software market lead us to believe that perceptions of price fairness indeed would have an influence on perceived sacrifice, perceived value and willingness to buy, even in indirect buyer-seller interactions, represented by lateral customer relationships. Some software companies (Borland, Microsoft) have recently introduced a new pricing policy, the so called competitive upgrade pricing, which allows customers switching from competitors' products to pay the same price offered to those who bought previous versions to upgrade to a new version of the software.

Past patrons complained bitterly, arguing that software companies should demonstrate "gratitude" for their past patronage by charging them a different price for product upgrades than they charge switching customers. What is interesting is that some buyers perceive the upgrade price charged them to be "fair in relation to the product users receive" (Martens 1991), i.e., to be fair in terms of perceived product benefits, and actually suggest that the company either lower the price quoted to past patrons, or increase the price charged to switching customers! Therefore, consistent with the propositions of equity theory, which suggests that two potential ways to reduce inequity may be to either decrease the losses of the short-changed individual or increase the losses of the individual experiencing an unfair advantage:

Proposition 3: A decrease (increase) in the perceived price paid by the customer will have a similar reducing (increasing) effect on his/hers perceptions of monetary sacrifice as an equivalent increase(decrease) in the perceived price paid by someone else.

This scenario is also consistent with Holbrook et al.'s (1984) finding that prices may play an ego-expressive role, in the sense that it affects the consumer self-concept. Finding and paying a low price for a particular product may lead consumers to feel smart and competent as shoppers, while paying a high price could cause them to feel resentful (Schindler 1989).

Another interesting observation resulting from complaints on the competitive upgrade pricing policy is the fact that perceptions of disadvantageous price inequity may result in reduced willingness to buy on the part of the customer. For instance, one customer stated that

"The policy of charging those who have Word For Windows Version 1.1 (such as myself) the same price as someone who has Word Perfect or Ami Pro is an insult to us. Frankly, if Microsoft is going to act this way, I am going to get a new word processing package. Not because I can't afford the price, but because I will not let someone ... all over me."

Therefore,

Proposition 4: A perceived disadvantageous price inequity, or a loss, increases buyers' perceptions of sacrifice and decreases buyers' perceptions of value and willingness to buy, while a perceived advantageous price inequity, or a gain, reduces buyers' perceptions of sacrifice, and increases buyers' perceptions of value and willingness to buy, as compared to a perceived equitable price.

Perceptions of fairness necessitate a comparison between the gains and losses achieved by two or more parties. According to Homans (1961, p.76), a man wonders if he is "getting as much as other men in some respect like me would get in circumstances in some respect like mine." Furthermore, for the purpose of establishing how equitable is the treatment they receive, individuals only compare themselves to those perceived to possess similar status or abilities. For instance, Merton (1957, p.242) notes that "some similarity in status attributes between the individual and the reference group must be perceived or imagined, in order for the comparison to occur at all." In pricing research, a relevant ability is the ability to pay the required monetary price to obtain a desired product. Therefore, we may infer that individuals compare themselves to those perceived as possessing similar monetary resources, i.e., similar incomes. Individuals who are perceived to possess a different income level may be quoted or pay different prices without this differential price necessarily resulting in perceptions of price inequity.

Proposition 5: When an individual compares the price he/she is offered for a particular product to the price someone else is offered for the same product and finds a discrepancy, perceived price inequity is more likely to result if their income levels are similar than if their income levels are different.

Anedoctal evidence suggests that better pricing terms may be offered to individuals generally considered as possessing lower incomes without provoking a distress response on customers to whom such price promotions are not extended. For example, most customers do not seem to perceive as inequitable the practice of charging senior citizens, children or students, all perceived as low income groups, a special, lower price than they are charged for the same products. In a sense, customers are accepting a decrease in the losses sustained by students, children and seniors as a way of restoring equity, since such groups are generally perceived as making additional sacrifices as a result of their low income status.

However, this "generosity" may have limits. Galston (1980) distinguishes natural needs, those basic means required for the attainment of urgent and universally desired ends, from luxury needs, those means which exceed such requirements. He ascribes "moral priority," worthy of distributive equity (distribution of rewards according to contribution) and even equality (distribution according to need), to natural needs only (Deutsch 1985, p.43).

For product categories other than basic necessities, it seems that not even the same price can be offered to individuals with lower incomes without provoking distress responses in some customers. In Martins and Monroe's (1993) experiment, subjects objected strongly to welfare recipients being given lower prices for imported bottled water.

Proposition 6: More favorable pricing terms offered to consumer groups generally perceived as low income on product categories considered basic necessities, such as food or transportation, are more likely to be perceived as fair by other customers than equally more favorable pricing terms offered to those groups on non-necessary products.

From equity theory, we can also infer that different prices can be offered to those customers possessing higher incomes without being accompanied by perceptions of inequity. For example, higher income customers qualify for gold credit cards, and therefore lower interest rates, i.e., better pricing for credit, than lower income customers. Preferred customer cards, in some cases, entitle card holders to better pricing terms. However, no known empirical evidence exists indicating whether other customers believe such arrangements to be unfair. Further, there is no known empirical evidence indicating whether the customers given preferential status feel the situation is inequitable.

IMPLICATIONS

Equity research postulates that exchange relationships are perceived by parties involved as either fair or unfair (Adams 1965; Adams and Freeman 1976). Past pricing research concerned with perceptions of price fairness have mainly focused on relationships between buyers and sellers. However, given that equity theory points out indirect exchange relationships as significant sources of fairness perceptions, lateral customer relationships would also seem to be a likely source of price fairness evaluations. Yet, concern with this aspect of the price fairness construct is conspicuously absent from price perceptions research.

However, there seems to be some evidence that customers do pay attention to the prices paid by other customers. Hence, it becomes important to examine the role that perceptions of price fairness resulting from differential pricing strategies will play in consumers' perceptions of product sacrifice, value and willingness to buy.

A confirmation of the significance of this aspect of the price fairness construct implies a need for reevaluation of past price-perceived quality research, in terms of whether the prices utilized in those studies were perceived to be fair. Inconsistent or weak findings may very well be explained by this addition to the price-perceived quality model.

Instances of consumer decision research other than those investigated in pricing also should be scrutinized for the presence of analogous perceptions of fairness. Non-price promotion research would seem to be a reasonable area to look for the presence of similar perceptions of fairness. Further, generalizable measures of fairness perceptions need to be developed. Finally, a typology of situations that lead to fairness assessments on the part of consumers needs to be constructed.

For managers, the addition of this construct to the price-perceived quality model would mean a reevaluation of prices offered to customer segments in terms of whether segments to whom the offer will not be extended perceive the price offer to be fair. Finally, a better understanding of customers' perceptions of price fairness would help managers develop strategies that reduce perceived unfairness and therefore promote product value. Indeed, the rationale for American Airlines' restructuring of prices in the Spring of 1992, was to reduce the perceptions that airline pricing was not fair. The objective of their price structure was to reduce the perception of inequitable prices for similar levels of service.

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