The Price of Power: How Firm's Market Power Affects Perceived Fairness of Price Increases

Zhi Lu, Lisa E. Bolton, Sharon Ng, Haipeng (Allan) Chen

Research output: Contribution to journalArticlepeer-review

18 Scopus citations

Abstract

How does market power affect consumer perceptions and purchase behavior? In the theoretically and pragmatically important context of price increases, we theorize that (i) consumer price fairness perceptions decline with market power when a price increase is due to costs; and (ii) this fairness difference arises due to greater perceptions of controllability and, in turn, exploitation by firms with higher market power. Consistent with our theorizing, we further argue that market power does not affect fairness (iii) when prices rise due to demand (which is perceived as equally exploitative and unfair regardless of firm power) or (iv) when price increases are clearly beyond the firm's control (and perceived as equally fair for firms with high and low market power). We provide empirical support for these predictions in a series of behavioral experiments combined with an analysis of retail scanner data. Together, our findings shed light on how market power and pricing actions jointly drive consumer perceptions of unfairness, with implications for firms’ pricing strategies, competition in the retail marketplace, and the principle of dual entitlement as a community standard of fairness in pricing.

Original languageEnglish
Pages (from-to)220-234
Number of pages15
JournalJournal of Retailing
Volume96
Issue number2
DOIs
StatePublished - Jun 2020

Bibliographical note

Funding Information:
This research was supported in part by Winspear research grant from the Gustavson School of Business and research grants from the Smeal College of Business. The authors would like to thank the James M. Kilts Center for Marketing at University of Chicago for providing the Dominick's database. The authors appreciate the constructive comments provided by the editor and three anonymous reviewers.

Publisher Copyright:
© 2019 New York University

Keywords

  • Firm market power
  • National brands
  • Price fairness
  • Price increase
  • Private labels
  • Retailing pricing

ASJC Scopus subject areas

  • Marketing

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