How does the retailer make pricing decision when consumers have justice reference price

Abstract

A series of studies demonstrate that consumers have fairness judgments about the retailer’s price which will impact their shopping decisions. Thus, it is necessary for the retailer to take consumers’ fairness concerns into account when setting his pricing policies. We assume that when the retailer’s price is lower than a consumer’s justice reference price, the consumer is likely to sense a positive price unfairness that will lead to increased consumer utility, and when the retailer’s price is higher than a consumer’s justice reference price, the consumer is likely to sense a negative price unfairness that will have a negative effect on consumer utility. According to the information conditions of the consumers’ justice reference price, the retailer should consider three situations: certain information, random information and partial information. In all situations, we show that the retailer has a unique optimal pricing strategy. Finally, through numerical examples, we find that our distribution-free policies perform almost the same as the results under the distributions that maximize the entropy. Our results reveal that it is important for the retailer to consider consumers’ fairness concerns, otherwise he may suffer losses when p c is very small.