Abstract
This research investigates optimal selling strategies and equilibrium welfare implications when some buyers are inequity averse and ex ante uncertain about seller variable cost. A fair selling equilibrium is characterized in which optimal seller behavior and buyer perceived fairness influence each other and are interactively derived. The analysis highlights the endogenous impact of the buyers' rational expectation about seller profit on their willingness to pay. It is shown that seller ex ante profit may increase as more buyers become inequity averse. In addition, buyer ex ante surplus can be nonmonotonically influenced by an increase in the size of the fair-minded buyers or in the degree of inequity aversion. These results pinpoint the importance to investigate the endogeneity of buyer fairness perception. Finally, the basic model is extended to examine how the fair selling equilibrium may be influenced by cost disclosure, buyer dynamic learning, and seller competition.
Published Version
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