Behavior-Based Pricing: An Analysis of the Impact of Peer-Induced Fairness

37 Pages Posted: 28 Mar 2015

See all articles by Krista J. Li

Krista J. Li

Indiana University

Sanjay Jain

University of Texas at Dallas

Date Written: March 22, 2015

Abstract

Firms tracking consumer purchase information often use behavior-based pricing (BBP), i.e., price discriminate between consumers based on preferences revealed from purchase histories. However, behavioral research has shown that such pricing practices can lead to perceptions of unfairness when consumers are charged a higher price than other consumers for the same product. This paper studies the impact of consumers' fairness concerns on firms' behavior-based pricing strategy, profits, consumer surplus, and social welfare. Prior research shows that BBP often yields lower profits than profits without customer recognition or behavior-based price discrimination. In contrast, we find that firms' profits from conducting BBP increase with consumers' fairness concerns. When fairness concerns are sufficiently strong, practicing BBP is more profitable than without customer recognition. However, consumers' fairness concerns decrease consumer surplus. In addition, when consumers' fairness concerns are sufficiently strong, they reduce inefficient switching and improve social welfare.

Keywords: Fairness; Behavior-Based Pricing; Dynamic Pricing; Game Theory; Behavioral Economics.

Suggested Citation

Li, Krista J. and Jain, Sanjay, Behavior-Based Pricing: An Analysis of the Impact of Peer-Induced Fairness (March 22, 2015). Available at SSRN: https://ssrn.com/abstract=2583500

Krista J. Li

Indiana University ( email )

107 S Indiana Ave
100 South Woodlawn
Bloomington, IN 47405
United States

HOME PAGE: http://kelley.iu.edu/faculty-research/faculty-directory/profile.cshtml?id=KJLI

Sanjay Jain (Contact Author)

University of Texas at Dallas ( email )

Jindal School of Management
University of Texas at Dallas
Richardson, TX 75080
United States

HOME PAGE: http://utdallas.edu/~sxj164830/

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