BY KEVIN MOE
Think about how hard it is to find your size shirt on the rack at an end-of-season sale. Economic theory would suggest that the more in-demand size would bring with it a higher cost, but it doesn’t. And why does Diet Coke cost the same as regular Coca-Cola, even though its consumer demand, not to mention ingredients, differ?
“We were puzzled by the popularity of uniform pricing that could not be well explained by current theories,” says Assistant Professor of Marketing Tony Cui. “We were trying to find a valid and convincing explanation for why stores are charging identical prices for branded variants even when the demands for those branded variants are very different.”
In their paper, “The Benefit of Uniform Price for Branded Variants” (forthcoming, Marketing Science), Cui and co-author Yuxin Chen of the Kellogg School of Management looked closely at this phenomenon. After careful study, they found that consumers’ concern for price fairness could be the possible reason for why firms charge uniform prices. The universal nature of consumers’ fairness concerns is well documented in prior psychology, economic, and marketing research.
“This finding, although interesting and reasonable, is not very surprising since people may think that firms would charge uniform pricing if consumers have a strong demand for fair prices,” Cui says. In other words, consumers may think that since the costs of producing branded variants are not very different, it is unfair if the prices are very different for different variants.
What is more surprising lies on the firm’s side. Having uniform pricing in response to consumers’ fairness concerns is actually beneficial to companies. “This happens when the more popular branded variants have a high price elasticity while the less popular branded variants have a low price elasticity,” Cui says.
Second, even if a company could persuade consumers that it is fair for it to charge different prices for its branded variants, it may not be in its best interest to do so. “The reason is because doing so may intensify price competition and increased price competition may not be good for the firm,” Cui says.
Cui and Chen plan to further investigate whether this theoretical prediction is consistent with empirical data. “We would also like to investigate the effect of price fairness on firms’ profits in general, and how firms can better manage consumers’ concerns to better compete in the market,” Cui says.