Special Session Summary Fairness Considerations in Business Interactions

Joydeep Srivastava, University of Maryland
Ana Valenzuela, San Francisco State University
[ to cite ]:
Joydeep Srivastava and Ana Valenzuela (2003) ,"Special Session Summary Fairness Considerations in Business Interactions", in NA - Advances in Consumer Research Volume 30, eds. Punam Anand Keller and Dennis W. Rook, Valdosta, GA : Association for Consumer Research, Pages: 188-191.

Advances in Consumer Research Volume 30, 2003     Pages 188-191

SPECIAL SESSION SUMMARY

FAIRNESS CONSIDERATIONS IN BUSINESS INTERACTIONS

Joydeep Srivastava, University of Maryland

Ana Valenzuela, San Francisco State University

SESSION OVERVIEW

Although standard economic theories do not account for fairness considerations in business interactions, there is a burgeoning literature in economics and psychology that explores the notion of fairness in a variety contexts including economic transactions (e.g., Kahneman, Knetsch, and Thaler 1986), consumer reactions to prices (e.g., Campbell 1999), and bargaining (e.g., Srivastava, Chakravarti, and Rapoport 2000). One of the most important findings to emerge from this literature is that potential economic agents may resist transactions that are perceived to be unfair. In fact, there is evidence that this resistance is often backed up by a willingness to incur a cost to avoid unfair transactions and unfair economic agents (e.g., Kahneman et al. 1986).

Work by Kahneman et al. (1986) shows that perceived fairness is a critical psychological factor that exerts considerable influence on people’s reactions to price and wage changes. Kahneman et al. (1986) proposed the dual entitlement principle that suggests that perceptions of fairness are reference dependent. Consumers are entitled to their reference price whereas firms are entitled to their reference profits, and a price increase is perceived to be unfair unless it is necessary to maintain reference profits. Campbell (1999) showed that inferred motive of a firm to increase its prices plays an important role in influencing perceptions of fairness.

Work by Roth (1995) in a bargaining context shows that participants resist unfair transactions and are even willing to punish unfair agents by incurring a loss or foregoing a gain. An example comes from the ultimatum game where an agent, A, is asked to propose a division of a sum of money (say $10) between himself or herself and another agent B. Agent B can either accept A’s proposal or reject it, in which case both agents receive nothing. Individuals in the role of agent B often reject offers that are not equal (say $3) despite the fact that they will gain $3 from the transaction. By rejecting offers that are perceived to be unfair, players punish the unfair agent.

Although the recent literature has begun to explore the factors that influence perceptions of fairness, it is still not clear what constitutes a fair transaction and what factors affect perceptions of fairness. The three papers in this session are a step forward in that direction. All three papers explore how fairness considerations influence transactions and identify factors that affect perceptions of fairness. In domains ranging from willingness to pay, reactions to change in posted prices, to determining price via bargaining, the papers highlight several factors that influence perceptions of fairness in systematic ways in the presence and absence of reference points. The three papers, although quite diverse, are complimentary and share a common focus on examining how fairness considerations impact consumer decision-making.

In the first paper, Nunes, Hsee, and Weber show that consumers’ intentions to pay vary as a function of the cost structure of the firm. Although previous research has documented the cost-plus pricing rule, this paper shows that it is important to differentiate between fixed cost and variable cost. They find that consumers perceive it fair to compensate the seller in proportion to what they have personally taken and thus willingness to pay was higher for products/services that have a high variable-fixed cost ratio relative to a low variable-fixed cost ratio.

In the second paper, Campbell and Pacheco examine the effect of source of the price change on perceptions of fairness of a posted price. Drawing on the literature on sensitivity bias, they predict that a price increase was perceived to be relatively unfair when the source of the change was a salesperson than when it was a sign. In particular, they find that perceptions of fairness of a price change were mediated by inferred motives.

In the third paper, Srivastava and Valenzuela examine how people form perceptions of fairness in a price determination setting where there are no objective prior reference points. Using the context of ultimatum bargaining, they show that opponents’ social identity plays a significant role in influencing people’s perceptions of fairness and their subsequent behavior. Interestingly, offers by outgroup members are attributed to their personality traits such as their level of competitiveness but offers by ingroup members are attributed to situational constraints such as the total sum to be divided.

Together, these three papers highlight the notion of fairness and factors that influence perceptions of fairness in different contexts. Professor Kent Monroe provided the impetus for the discussion by not only summarizing the work but also highlighting areas of future research. He noted that transparency of price procedures and motivations is a key driver of fairness perceptions. He called for more research on the underlying psychology of fairness and for future research to depart from scenario based studies.

 

INDIVIDUAL PAPER ABSTRACT - S

THE EFFECT OF PRODUCTS’ COST STRUCTURE ON CONSUMER PAYMENT AND PURCHASE INTENTIONS

Joseph C. Nunes, University of Southern California

Christopher K. Hsee, University of Chicago

Elke U. Weber, Columbia University

"And best of all, it’s FREE. If you feel the site is useful, then pay me what YOU think the advice and service is worth!" Robert Woodhead, Creator of the Web Site SelfPromotion.com

SelfPromotion.com is one of a number of online services that helps people learn how to create search-engine-friendly web pages, and submit their URLs to all of the major search engines, all for whatever the consumer think if fair to pay. It is what has come to be known among Internet aficionados as a ShareServiceTM. The way in which the growing number of online services and shareware providers do business is unconventional. First, the user is not obligated to pay for what he or she has acquired or consumed. Second, if a payment does occur, it is the consumer and not the seller who sets the price in a way that s/he considers fair. A problem with such products is that most people do not pay. According to the Association of Shareware Professionals, more than 50% of shareware users never register (i.e., pay anything) for the software they download and continue using.

The main tenet of this research is that the impetus to pay for certain types of goods is greater than for other types of goods, and that what often distinguishes these two types of goods is the cost structure. We use the term "cost structure" to describe the ratio of a product or service’s variable cost to its fixed cost. The fixed cost (FC) changes little regardless of how many units of the products are produced. The variable cost (VC) is the cost ascribed to producing a single unit of the product over and beyond the FC. Software is an example of a product with an extremely low VC-to-FC ratio. The VC of allowing one more person the use of a program like SelfPromotion is virtually nothing, as almost all of the costs are accrued in the initial investment (e.g., writing the program).

In this research, we demonstrate how consumers are typically much less willing to pay for products with a low VC-to-FC ratio, such as information products, than products with a high VC-to-FC ratio, such as conventional tangible products. This is primarily because they feel that it is fair to compensate the seller in proportion to what they feel they personally have taken (i.e., the perceived deprivation).

Study 1 demonstrates the effect of cost structure on consumers’ payment intention and reveals the effects of several mediating variablesCperceived consequence to the seller (loss versus foregone gain), and perceived harm to the seller. The scenario-based survey stated that the respondent was in need of the product (software) and could take it without paying for it. Respondents were told that they were learning Russian and need a word processing program that includes the Cyrillic alphabet called RussianStar. In one condition, the software vendor paid the programmers an initial royalty of $10,000 and $60 for every copy of the program downloaded. In the second condition, the vendor paid $600,000 up front and $1 per copy downloaded. Participants were told that the vendor expected 10,000 copies to be downloaded.

When the primary cost was described as its initial investment (FC), most of the respondents perceived a failure to pay as a foregone gain to the vendor. When the primary cost of the software was described as the variable cost (VC), majority of respondents perceived a failure to pay as a loss to the vendor. Further, majority of the people believed their behavior would do a greater harm to the vendor in the high-VC scenario than in the high-FC scenario. Accordingly, most of the respondents reported that they would more likely to download the software without paying in the high-FC scenario than in the high-VC scenario.

Study 2 was a replication of Study 1 within a different context and utilizing a different way of arriving at variable and fixed costs. Studies 3 replicates the results in a between subjects design with a subtle cost framing manipulation while studies 4 and 5 examine the effects of cost structure on the perceived fairness of a given price and purchase intention. The final study looks at the effect of "perceived deprivation" in which respondents either downloaded software (a game) from a web site, or were simply handed a disk with the software already on it. When respondents downloaded the game, they were more likely to believe the supply was endless and they did not really deprive the programmer of anything, especially the ability to sell the software to another. Conversely, those who were simply handed a disk were more likely to feel that they were "taking" something from the programmer and it was only fair to pay for it. The number of people willing to pay something, and the amount paid, was significantly greater in the condition where the respondents were handed the disk. A number of process measures confirmed respondents sense of depriving the creator of something was stronger when they were simply handed the disk.

This research also has important implications for what influences people’s perceptions of fairness and wrongdoing. Our findings suggest people’s perceptions of the seriousness of a wrongdoing may depend on the degree to which they feel they have deprived the victim of something.

 

WHO SAYS? HOW SOURCE INFLUENCES CONSUMERS’ INFERENCES & PERCEPTIONS OF PRICE FAIRNESS

Margaret C. Campbell, University of Colorado

Barney Pacheco, University of Colorado

Perception of fairness is an important factor in consumers’ responses to prices (Monroe 1990). In a highly influential paper, Kahneman, Knetsch and Thaler (1986) propose the principle of dual entitlement. They suggest that perceptions of price fairness are based on a reference transaction: the transactor (e.g., the customer, employee, etc.) is entitled to the reference price but the firm (e.g., merchant, employer, etc.) is likewise entitled to the reference profit. Violations of the reference price are considered unfair unless the price increase is necessary to maintain reference profits. The principle of dual entitlement has captured important aspects of perceptions of price unfairness. However, it appears that other factors exist that influence perceived price unfairness. For example, recent research has shown that price increases are perceived as fair or unfair in part depending upon whether the consumer infers that the firm is intending to take advantage of consumers (Campbell 1999).

We propose that an additional factor that influences perceptions of the fairness or unfairness of a price is the source of the price change. That is, the perceived unfairness of a price is likely to be influenced by whether a person (e.g., a salesperson) or an object (e.g., a price tag) is the source of price change information. This is supported by work on the person sensitivity bias, a bias in evaluation of performance such that a person is evaluated more positively than an object when there is a good outcome, but a person is evaluated more negatively than an object when there is a negative outcome (Moon and Conlon 2002).

The research on the person sensitivity bias has not yet pinpointed the underlying process. There is some evidence to suggest that the bias may arise from underlying attributions. That is, people may be more attuned to attributional explanations with people than objects (Moon and Conlon 2002). Combining this and the work that shows that inferred motive is an important factor driving perceptions of fair prices (Campbell 1999) suggests that consumers are more likely to make inferences of the reasons for a price increase when the source of the price change is a person than when it is a store. When there is a price decrease, consumers are less likely to engage in attributional thinking such that they are less likely to make attributions for the price change.

Drawing on this, we propose that there will be an interaction between the source of a price change and the direction of a price change on the perceived fairness of the price. When a price is increased, the consumer will perceive the new price as more unfair when a salesperson presents the price than when a price tag presents the price. When a price is decreased, however, perceived unfairness will not be affected by whether the price decrease is presented by a salesperson rather than a price tag.

It follows that inferences of motives are likely to mediate the effects of source and price change on perceived fairness. In addition, research on fairness and justice has determined that there are two types of fairness: distributive and procedural. Distributive fairness is based on the outcome while procedural fairness is based on the way in which the outcome was reached (Thibaut and Walker 1975). We propose that a different pattern will appear for perceptions of the fairness of the way in which the price was set than for the perceived fairness of the price itself. When asked to evaluate the way in which a price was set, people are more likely to consider the reasons for the price change for both the price tag and the salesperson. Because persuasion knowledge is likely to be more accessible for a salesperson than for a tag, the consumer is more likely to infer ulterior motive, both for a price increase and decrease (Campbell and Kirmani 2000). Thus, procedural fairness will be lower for the salesperson than the price tag regardless of whether the price is increased or decreased.

A 2 (price change: increase or decrease) x 2 (source: salesperson or price tag) study was conducted. Perceptions of price fairness show the predicted interaction effect; when there was a price increase, the price was perceived to be more unfair when it was stated by the salesperson (mean=2.86) than by a price tag (mean=4.00). However, there was no difference in perceived fairness when a price decrease was given by the salesperson (mean=5.31) or the price tag (mean=5.33). This provides support for the predicted person "negativity" bias in perceptions of price fairness.

Perceptions of procedural fairness showed main effects of price change and source. However, there was no evidence of an interaction effect (F<1). As expected, the price increase was seen as more unfair than the price decrease, and the procedure was seen as less fair when the price change was given by the salesperson rather than the price tag. Mediation analyses showed that the effects on both perceptions of fair price and procedural fairness were at least partially mediated by the inferred motives. A second study replicated these results within a different product category and with different manipulations of the source and the price change.

 

FAIRNESS PERCEPTIONS IN BARGAINING WITH ONE-SIDED INCOMPLETE INFORMATION

Joydeep Srivastava, University of Maryland

Ana Valenzuela, San Francisco State University

Business negotiations are not just an economic interaction, but also a social interaction where the different parties intend to maximize group utility (Loewenstein, Thompson and Bazerman 1989). In this context, fairness perceptions become especially important. Consequently, this research examines how people form perceptions of fairness in a bargaining context and the subsequent effect of these perceptions on bargaining behavior.

In a complete information bargaining context, it is relatively trivial for people to determine what constitutes a fair offer. However, in a one-sided incomplete information bargaining scenario, it is not clear how uninformed bargainers’ perceptions of fairness are formed. Past research has shown that motive inferences should play an important role (Srivastava 2001). This research examines the role of opponent’s social identity in the formation of fairness perceptions and the attributions that people make based on the opponent’s behavior. Social identity is defined by membership to a group. In incomplete information bargaining situations, wrong inferences of offer fairness can be made hen the negotiating party does not have the same group identity. In this case, behavior is motivated by beliefs about the out-group member’s personality. This is a form of "out-group derogation" (Kramer, Shah, and Woerner 1978). Systematic processing may eliminate this type of inferences.

Using the context of an ultimatum bargaining game, we conduct two experiments to examine how varying levels of offers affect fairness perceptions, attributions, and behavior of the responder (the second player in the ultimatum game) as a function of the proposer’s social identity. Using the context of an ultimatum game has several advantages. First, it has been extensively studied in the literature (e.g., Roth 1995). Second, it represents a situation where behavioral anomalies in experimental economics have been found based on reactions to unfair offers. Finally, the ultimatum game represents the end game of any continuous negotiation and provides a sterile environment in which to study fairness issues.

The first experiment shows that in complete information settings, fairness perceptions and responders’ likelihood of acceptance is determined by the proposer’s offer level. However, in the case of incomplete information, the social identity of the proposer significantly affects responders’ perceptions of fairness and thereby their behavior. In particular, responders’ perceptions of fairness and likelihood of acceptance increase with the offer level when the offer comes from an in-group proposer. In contrast, the likelihood of acceptance does not change with offer level when the offer comes from an out-group proposer. In fact, perceptions of fairness are lower in the fair offer condition relative to the unfair offer condition. The second experiment shows that in the incomplete information scenario, responders give the benefit of the doubt to in-group proposers but not to out-group proposers. In that case, they attribute the offers to proposers’ personality traits such as their level of competitiveness rather than attributing the offers to the total surplus available. However, when attention is drawn to the fact that the offer level may reflect the total surplus, the fundamental attribution error (attributing the offers to personality traits rather than situational constraints) is reduced and responders’ acceptance rates increase with offer level.

REFERENCES

Babcock, Linda, Loewenstein, George, Issacharoff, Samuel and Colin Camerer (1995) "Biased Judgments of Fairness in Bargaining," The American Economic Review, 85 (5), 1337-1343.

Campbell, Margaret C. (1999), "Perceptions of Price Unfairness: Antecedents and Consequences," Journal of Marketing Research, 36 (May), 187-199.

Campbell, Margaret C. and Amna Kirmani (2000), "Consumers’ Use of Persuasion Knowledge: The Effects of Accessibility and Cognitive Capacity on Perceptions of an Influence Agent," Journal of Consumer Research, 27 (June), 69-83.

Gnth, Werner, Schmittberger, Rolf and Bernd Schwarze (1982), "An Experimental Analysis of Ultimatum Bargaining," Journal of Economic Behavior and Organization, 3, 367-388.

Loewenstein, George, Leigh Thompson, and Max H. Bazerman (1989), "Social Utility and Decision Making in Interpersonal Contexts," Journal of Personality and Social Psychology, 57 (3), 426-441.

Kahneman, Daniel, Jack L. Knetsch, and Richard Thaler (1986), "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, 76 (4), 728-741.

Kramer, Roderick M., Pri Pradhan Shah, and Stephanie L. Woerner (1995), "Why Ultimatums Fil: Social Identity and Moralistic Aggression in Coercive Bargaining," in Negotiation as a Social Process: New Trends in Theory and Research, Roderick M. Kramer and David M. Messick (Eds.), Sage: Thousand Oaks, CA, 285-308.

Monroe, Kent (1990), Pricing: Making Profitable Decisions, Mc-Graw Hill: NY.

Moon, Henry and Donald E. Conlon (2002), "From Acclaim to Blame: Evidence of a Person Sensitivity Decision Bias," Journal of Applied Psychology, 87 (February), 33-42.

Roth, Alvin E. (1995), "Bargaining Experiments," in J. Kagel and A. E. Roth (eds.), Handbook of Experimental Economics, NJ: Princeton University Press, 253 -348.

Srivastava, Joydeep (2001), "The Role of Inferences in Sequential Bargaining with One-Sided Incomplete Information: Some Experimental Evidence," Organizational Behavior and Human Decision Processes, 85 (May), 166-187.

Srivastava, Joydeep, Dipankar Chakravarti, and Amnon Rapoport (2000), "Price and Margin Negotiations in Marketing Channels: An Experimental Study of Sequential Bargaining under One-Sided Uncertainty and Opportunity Cost of Delay, Marketing Science, 19 (2), 163-184.

Thibaut, J.W. and L. Walker (1975), Procedural Justice: A Psychological Analysis, Hillsdale, NJ: Erlbaum.

Urbany, Joel E. Thomas J. Madden and Peter R. Dickson (1989), "All’s Not Fair in Pricing: An Initial Look at the Dual Entitlement Principle," Marketing Letters, 1 (1), 17-25.

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