Signaling through Price and Quality to Consumers with Fairness Concerns

Abstract

Consumers with inequity aversion experience some psychological disutility when buying products at unfair prices. Empirical evidence and behavioral research have suggested that consumers may perceive a firm's price as unfair when its profit margin is too high relative to consumers’ surplus. The authors develop an analytical framework to investigate the effects of the consumer's inequity aversion on a firm's optimal pricing and quality decisions. They highlight several findings. First, because of the consumer's uncertainty about the firm's cost, the firm's optimal quality may be nonmonotone with respect to the degree of the consumer's inequity aversion. Second, stronger inequity aversion makes an inefficient firm worse off but may benefit an efficient firm. Third, stronger inequity aversion by the consumer can actually lower the consumer's monetary payoff (economic surplus) because the firm may reduce its quality to a greater extent than it reduces its price. Finally, as the expected cost efficiency in the market decreases, both the expected quality and the social surplus may increase rather than decrease.

To Share or Not to Share: Demand Forecast Sharing in a Distribution Channel

“…We also contribute to the literature on signaling in various problem settings, including quality signaling using money-back guarantees (Moorthy and Srinivasan 1995), signaling of price images (Simester 1995, Shin 2005, demand or cost information signaling using two-part tariffs (Tirole 1988, Gallini andWright 1990), cost signaling to inequity-averse consumers (Guo and Jiang 2016) or to forward-looking consumers in a dynamic setting , signaling by ethical service providers (Jiang et al 2014), a seller's demand signaling to the platform owner (Jiang et al 2011), a manufacturer's demand signaling to retailers using multiple messages (Desai 2000), and a franchisor's demand signaling using two-and three-part tariffs to an uninformed franchisee whose unobservable effort also influences demand (Desai and Srinivasan 1995). By contrast, our paper focuses on demand signaling with the commonly used wholesale price contract and studies the impact of forecast accuracy and risk aversion under different information-sharing contexts.…”

Dynamic pricing with fairness concerns and a capacity constraint

“…We use this utility model as the basis for incorporating fairness into our model. Previous research has used a similar approach to incorporate fairness into models of channel pricing (Cui et al 2007), third-degree price discrimination (Englmaier et al 2012;Okada 2014), pricing with customer recognition (Li and Jain 2016), pricing with private information about the firm's costs (Guo 2015;Guo and Jiang 2016), and pay-as-you-wish pricing (Chen et al 2017). These earlier models do not involve shortages or rationing in equilibrium.…”

Impact of the product quality on consumer satisfaction and corporate brand

“…Nevertheless, in case of other products, such as jewelry or medicine, this quality remains uncertain even after the purchase because consumers are not able to asses it (Palma et al, 2016) [17]. Moreover, quality can be described through the packaging and services, which means that better packaging and services may lead to the perception of high quality (Guo & Jiang, 2016) [3]. Other authors, among whom are Lewis, Grebitus and Nayga (2016) [12], classify attributes of quality according to search, experience and the so called credence attributes.…”