Journal of Product & Brand Management

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Journal of Product & Brand Management
Emerald Article: Price fairness
Herman Diller
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To cite this document: Herman Diller, (2008),"Price fairness", Journal of Product & Brand Management, Vol. 17 Iss: 5 pp. 353 - 355
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Herman Diller, (2008),"Price fairness", Journal of Product & Brand Management, Vol. 17 Iss: 5 pp. 353 - 355
http://dx.doi.org/10.1108/10610420810896103
Herman Diller, (2008),"Price fairness", Journal of Product & Brand Management, Vol. 17 Iss: 5 pp. 353 - 355
http://dx.doi.org/10.1108/10610420810896103
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Pricing strategy & practice
Price fairness
Herman Diller
Universität Erlangen-Nürnberg, Nürnberg, Germany
Abstract
Purpose – The purpose of this article is to integrate the various strands of fair price research into a concise conceptual model.
Design/methodology/approach – The proposed price fairness model is based on a review of the fair pricing literature, incorporating research
reported in not only English but also German.
Findings – The proposed fair price model depicts seven components of a fair price: distributive fairness, consistent behaviour, personal respect and
regard for the partner, fair dealing, price honesty, price reliability, and influence/right of co-determination.
Practical implications – Since buyers’ purchase decisions are influenced by their subjective perception of price fairness, sellers need to understand
what constitutes a fair price.
Originality/value – This model provides a concise representation of the multi-dimensional concept of price fairness. It identifies aspects of a fair price
which have hitherto received little research; for example, the need for personal respect for the partner and the right of co-determination.
Keywords Prices, Research
Paper type Research paper
Until now, the topic of price fairness has received relatively
little scientific examination, apart from one fundamental
study by Kahneman et al. (1986), which approached the
problem from a prospect-theoretical point-of-view.
The problem has been studied for the most part from a
perception-theoretical approach (Thaler, 1985), sometimes
even from the equity-theoretical viewpoint (Maxwell, 1995),
but it is rarely examined with respect to attribution theory
(Campbell, 1999). The equity theory is especially applicable
here. According to it, the distribution of returns from a
common activity is considered fundamentally just and wellbalanced when all involved perceive the relation between their
own contributions and the returns they expect from their
participation in the project as (relatively) equal (cf. Mikula,
1980, p. 17; Schwinger, 1980, p. 109). A further extension of
the equity assessment is the so-called multiple principle
assessment (cf. Deutsch, 1975; Leventhal, 1976), which
provides various ways to evaluate an allocation of returns
based upon cooperatively gained yields.
The concept of distribution fairness (just distribution)
concerns the returns or the proportional allotment of a
distribution of resources or premiums already on hand.
Kahneman et al. (1986) use data from a wide variety of
questionnaires to demonstrate that people measure their sense
of fairness against a comparable referential situation, let’s say
the status quo, to which the participants are bound. If costs
increase, for example, the seller can pass the price increases
on if his/her profit margin remains the same (“profit
protection”). The exploitation of exogenously caused
conditions (price increases for snow removal following a
blizzard for example) is looked upon as unfair, even if it is in
conformity with the market. In such instances, the market
price mechanism is likely to be distrusted. That is not to say
that it is considered unfair, but rather as less fair than a cost
plus calculation. This type of cost-oriented price ethics is
widespread (cf. Wied-Nebbeling, 1985, p. 44ff). A price
change is considered more unfair if the seller is suspected of
“bad”, i.e. selfish motives than if “good” motives (job
retention, for example) are attributed to him (Campbell,
1999). If “windfall profits” (increases in market price against
a steady cost situation, for example) should accrue to a seller,
it is certainly not considered unfair to rake them in. Of course,
this does not hold true for progressive price increases on the
part of a seller. Moreover, “genuine” (out of pocket) losses on
the side of the purchaser (losses in the sense of the prospect
theory), or price increases for example, are perceived as a
more serious vitiation of price fairness than an equally large
revocation of opportunistic profits (the elimination of a bonus
program, for example).
The concept of just procedure (procedural fairness) looks at
the process underlying and leading to the eventual returns.
Fair dealings are consistent, unprejudiced and non-partisan;
they represent the interests of all partners, and are based upon
accurate and careful information as well as upon ethical
standards (cf. Leventhal et al., 1980, p. 223f). In cases of
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1061-0421.htm
This model and text were published first in Diller, H.J. (2000), Preispolitik,
Kohlhammer et al., Stuttgart, pp. 183-8 (4th edition 2007). Reprinted
with permission of the author from Preispolitik, by Hermann Diller.
Translated by Susan Hecker Ray, Professor of German, Fordham
University.
Journal of Product & Brand Management
17/5 (2008) 353– 355
q Emerald Group Publishing Limited [ISSN 1061-0421]
[DOI 10.1108/10610420810896103]
353
Price fairness
Journal of Product & Brand Management
Herman Diller
Volume 17 · Number 5 · 2008 · 353 –355
doubt a good reputation on the part of the seller has a positive
effect on the perception of fairness, which only underscores
the significance of a corresponding image policy (Campbell,
1999; Diller, 1997b). One occasionally cited thesis is very
interesting in this context; namely the thesis that procedural
fairness is more important for the perception of fairness than
is the concept of just distribution (or distribution fairness). If
each partner is given an equal chance, as far as procedure is
concerned, to acquire that which is his/her due, the return is
acknowledged even if it does not turn out to be in conformity
with just distribution. Announcements of price increases are
considered fair in so far as the buyer is offered the opportunity
of stockpiling at the old prices. Price auctions, on the other
hand, are likely to be considered unfair, because, in contrast
to the market price, they tend to serve the seller alone
(Kahneman et al., 1986, p. 735).
Just (or fair) interaction refers to the manner, or the rules
regulating the execution of a specific interaction. A business
policy aimed at long-term relations demands solidarity, that
is, the willingness and intention to maintain such relations
even in cases of conflict. Kaufmann and Stern (1988) were
able to demonstrate that such an attitude strongly determines
the fairness perception on the part of the partners. In their
study, conflicts in business relations founded upon solidarity
were considered less unfair than among those in transactionoriented relations.
Another important factor influencing the relevance of
fairness with respect to business relations is the idea of power
asymmetry. The greater the asymmetry, the greater the
danger of encountering unequal, unfair allocations of returns
gained through cooperative agreements. It has been
repeatedly demonstrated that even price increases that are
conditioned by market forces are perceived as unfair
(Kalapurakal et al., 1991). On the other hand, the
consumer seems to see himself right from the start in a
weaker market position because s/he does not consider his/her
own “playing one seller against the other” as unfair. On the
basis of these considerations, one can say that fairness can be
enforced, so to speak, if one makes concessions for
symmetries with regard to influence and information. In
cases of asymmetries, the more powerful partner is expected
to give credible signals to the effect that he/she is not willing to
employ his/her superiority for his/her own gains. This
introduces another possible interpretation of the concept of
fairness: only when one partner is potentially able to unfairly
deploy his/her surplus of influence and information for his/her
own ends in business relations is there any possibility of fair
practice in the first place. Fairness, then, is especially relevant
in those business relations that involve asymmetrical
information or power balances.
These theoretical and empirical findings show that the
subjectively perceived fairness on the part of the business
partner obviously represents a multi-dimensional construct.
Building upon the above-mentioned findings, one can
differentiate seven components that directly impact upon
the concept of price fairness (see Figure 1).
Figure 1 Components of price fairness
Distributive fairness
The right of influence and co-determination
This refers to the fact that the price and the service/product
stand in a standard market-acceptable relation to one another.
Should one partner deliberately try to improve his/her
position unilaterally, such an act is considered unfair.
The possibility of exerting an influence and the right of codetermination in the shaping of the business relation promote
acceptance, especially in asymmetrical relations. In this vein
Leventhal (1976, p. 139) states that people are more inclined
Foregrounded here, of course, is the idea of distributive
fairness, or just distribution. “The cardinal rule of fair
behaviour is surely that one person should not achieve a gain
by simply imposing an equivalent loss on another”
(Kahneman et al., 1986, p. 731). Both partners should
share in the results of exogenous events.
Consistency
Consistency implies that the interaction procedures between
the partners always follow the same “conformities to rule”; in
other words, for example, that they all act in keeping with the
same pricing formulas. It is assumed that the business
partners will observe and hold to specific, written or
unwritten standards and rules. If one partner wants to
change these rules, he/she must announce his/her intention
and the details of it to the other partner openly and
persuasively beforehand.
Price reliability
This concerns the observance of the prices that were
established at the time the contract was signed. It can
become a problem, however, especially when unforeseen
service conditions turn up during the performance of the
same – when, for example, initially hidden inventory
deficiencies delay automobile repairs. The seller assumes
these risks by establishing flat rates, which is why such lump
prices are considered especially fair, even though such cases as
the one described above have conceivably been incorporated
into those prices in advance.
Pricing honesty
Pricing honesty is one aspect that is tuned particularly to the
truth and clarity of the pricing information (cf. Diller,
1997b). The customer expects accurate, easily
comprehensible, unadulterated and complete information
concerning prices, conditions and services. He/she relies upon
the fact that his/her business partner will not try to take
advantage of him/her, even if, for some reason, he/she is not
careful enough and fails, for example, to study in detail all the
“small print” in the contract(s).
354
Price fairness
Journal of Product & Brand Management
Herman Diller
Volume 17 · Number 5 · 2008 · 353 –355
to accept compromises, decisions and the consequences of
such decisions if they have had a voice in the determination of
same. This is the case, for example, in what is known as
corporate target pricing. It results in the concurrent increase
of satisfaction with such decisions. This component of price
fairness also impacts the concept of just procedure, which can
play a particularly important role in individual price
negotiations. If prices are forced upon a partner without his
or her ability to present counterarguments, such procedure is
considered unfair.
interprets them in a way more commensurate with the new
situation.
References
Campbell, M.C. (1999), “Perceptions of price unfairness:
antecedents and consequences”, Journal of Marketing
Research, Vol. 36 No. 2, pp. 187-99.
Deutsch, M. (1975), “Equity, equality and need”, Journal of
Social Issues, Vol. 31 No. 3, pp. 137-50.
Diller, H. (1997b), “Preisehrlichkeit – Eine neue Zielgröße im
Preismanagement des Einzelhändlers”, Thexis, Vol. 14
No. 2, pp. 16-21.
Kahneman, D., Knetsch, J.L. and Thaler, R.H. (1986),
“Fairness and the assumptions of economics”, Journal of
Business, Vol. 59 No. 4, pp. 285-300.
Kalapurakal, R., Dickson, P.R. and Urbany, J.E. (1991),
“Perceived price fairness and dual entitlement”, Advances in
Consumer Research, Vol. 18 No. 1, pp. 788-93.
Kaufmann, P.J. and Stern, L.W. (1988), “Relational exchange
norms, perceptions of unfairness, and retained hostility in
commercial litigation”, Journal of Conflict Resolution, Vol. 32,
September, pp. 534-52.
Leventhal, G. (1976), “Fairness in social relationships”, in
Thibaut, J. and Carson, R. (Eds), Contemporary Topics in
Social Psychology, General Learning Press, Morristown, NJ,
pp. 211-39.
Leventhal, G.S., Karuza, J. and Fry, W.R. (1980), Beyond
Fairness: A Theory of Allocation Preferences, Springer-Verlag,
New York, NY.
Maxwell, S. (1995), “What makes a price increase seem
“fair”?”, Pricing Strategy and Practice, Vol. 3 No. 4, pp. 21-7.
Mikula, G. (1980), Gerechtigkeit und soziale Interaktion,
Huber, Bern.
Schwinger, T. (1980), “Gerechte Güterverteilungen.
Entscheidungen zwischen drei Prinzipien”, in Mikula, G.
(Ed.), Gerechtigkeit und soziale Interaktion, Huber, Bern,
pp. 107-39.
Thaler, R. (1985), “Mental accounting and consumer
choice”, Marketing Science, Vol. 4 No. 3, pp. 199-214.
Wied-Nebbeling, S. (1985), Das Preisverhalten in der Industrie,
Mohr Siebeck Verlag, Tübingen.
Respect and regard for the partner
This component concerns one’s fundamental attitude toward
the business partner with whom one hopes to establish a longrange relation. “Regard” implies that the more powerful of the
two shall not exercise any excessive pressure over the weaker
partner, that s/he shows understanding for the latter’s
problems and is not interested solely in his/her own
advantages. Fairness research calls this the principle of
solidarity (Kaufmann and Stern, 1988, p. 535). It is a matter
of balancing out one’s own interests and problems in each
instance with those of the business partner. If, for example, a
service provider can no longer hold to his/her promised prices
because of an unexpected price increase in pre-existing
inventories, a corresponding renegotiation is expected on the
part of the buyer in keeping with fair business practices.
Fair dealing
The concept of fair dealing stipulates generosity in the case of
doubt and flexibility in the face of unforeseen circumstances.
Generosity is revealed in a readiness to meet the partner
halfway and in the renunciation of a petty interpretation of
contracts or agreements. Even when it is not legally
demanded, the fair business partner, for example,
guarantees cost free repairs or replacements in situations
involving relatively small shortages or deficiencies. Flexibility
in the interpretation of the business relation, for example, can
lead to an increased sense of fairness, if one contractual
partner does not stubbornly cling to – perhaps even longstanding – predetermined rules, for example, but rather
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