Peer-induced fairness and personalized pricing in a channel

Abstract

Consumers incur utility loss when they find that their peers pay different prices for the same product, which seemingly poses a threat to firms practising personalized pricing. This paper studies the interaction between peer-induced fairness and personalized pricing in a distribution channel consisting of one manufacturer and one retailer. While consumers are fair-minded, the retailer can apply personalized prices. Using a game-theoretic approach, we find that consumer fairness concern compels the retailer to reduce prices. However, the retailer will reduce the price toward high-valued consumers by a larger amount than the price toward low-valued consumers. This drives the manufacturer to offer a much lower wholesale price. As a result, the retailer using personalized pricing is better off in the presence of consumer fairness concern. This finding still holds when the capability of personalized pricing is endogenous, when social comparison may increase a consumer’s utility, and when the degree of fairness concern depends on the size of population. These effects are unique to peer-induced fairness, while related emotions such as distributional fairness concern cannot improve the retailer’s profit.