Dynamic pricing in internet retail: Effects on consumer trust

Abstract

Individual-level price discrimination, while not a new idea, is more than a theoretical possibility in the Internet age. Economic theory argues that dynamic pricing (i.e., individual-level price discrimination) is inherently good for the profitability of the firm, because it allows the firm to capture a larger share of the consumer surplus, but anecdotal evidence from recent retail experiments with Internet-based dynamic pricing suggests that consumers react strongly against this practice. Using a two-dimensional conceptualization of trust, based on benevolence and competence trust, the current experiment examines how the experience of a dynamic pricing event and the direction of the pricing discrimination (i.e., whether one is offered the higher or the lower price) affects both the mean levels of trust and the weight given to the separate trust dimensions in the formation of overall trust. Because demand-based pricing, such as dynamic pricing, is generally considered unfair, it is expected that trust levels will be lower and that more weight will be given to benevolence trust. Results show that mean benevolence trust is significantly lower (which leads to a marginal decrease in overall trust) and the weight given to benevolence trust in the formation of overall trust substantially increases. The direction-of-price-discrimination effects are generally unsupported. ᭧

Unfairness in consumer services: Outcomes of differential treatment of new and existing clients

“…Our research makes several contributions. First, although the issue of price discrimination has received substantial theoretical attention in the economics and operations literature (Garbarino and Lee, 2003), few studies have linked differential treatment practised by firms with customers' perceptions of unfairness (Nguyen and Klaus, 2013), especially as regards services (Bolton and Alba, 2006;Martín-Ruiz and Rondán-Cataluña, 2008). Furthermore, not only do we highlight the direct impact of unfairness on intention to repurchase, but we also demonstrate the significance of trust and satisfaction as mediators.…”

“…Nowadays, not only are price discrimination and dynamic pricing (Kopalle et al, 2009) becoming common retail pricing strategies (Levy et al, 2004), but also increasingly informed and connected consumers are becoming more aware of prices offered to other customers (Cox, 2001;Feinberg et al, 2002;Garbarino and Lee, 2003;Nguyen and Klaus, 2013). This is especially true with regard to services, where word of mouth tends to be more prevalent (Nguyen and Simkin, 2013) and customers regularly interact with other customers and are able to observe superior value propositions being awarded (Lacey and Sneath, 2006).…”

“…Moreover, a lack of price transparency creates conditions for mistrust. Garbarino and Lee (2003) have noted that dynamic pricing which results in unexplained price differentials leads to diminished trust in the seller.…”

“…Nguyen and Klaus (2013) found that customers may find differential treatment acceptable, as long as it rewards loyal customers, because "it is the way business is done". However, if in a society people feel that a pricing tactic is against the norm, they might react negatively regardless of whether they were offered the higher or the lower price (Garbarino and Lee, 2003). Grewal et al (2004) argue that pricing tactics contrary to the social norm, such as charging a regular customer more, engender less trust than pricing tactics consistent with norms, especially benevolence trust (Garbarino and Maxwell, 2010).…”

Mobile Money: The Effect of Service Quality and Competition on Demand

“…Benevolence trust is commonly defined as the "perceived willingness of the trustee to behave in a way that benefits the interests of both parties, with a genuine concern for the partner, even at the expense of profit" (Garbarino and Lee 2003). Posting of CICO pricing is both mandated by operators and expected by consumers.…”