Abstract
PurposeIn this paper, the authors study the effect of consumers' fairness preferences on dynamic pricing strategies adopted by platforms in a non-cooperative game.Design/methodology/approachThis study applies fair game and repeated game theory.FindingsThis study reveals that, in a one-shot game, if consumers have fairness preferences, dynamic prices will slightly decline. In a repeated game, dynamic prices will be reduced even when consumers do not have fairness preferences. When fairness preferences and repeated game are considered simultaneously, dynamic prices are most likely to be set at fair prices. The authors also discuss the effect of platforms' discounting factors, the consumers' income and alternative choices of consumption on the dynamic prices.Research limitations/implicationsThe study findings illustrate the importance of incorporating behavioral elements in understanding and designing the dynamic pricing strategies for platforms and the implications on social welfare in general.Originality/valueThe authors developed a theoretical model to incorporate consumers' fairness preference into the decision-making process of platforms when they design the dynamic pricing strategies.
Highlights
To match supply and demand more efficiently, platforms often apply dynamic pricing strategies
We argue that no matter the dynamic pricing takes the form of surge pricing to meet high demand, or price discrimination based on consumer characteristics, if consumers believe that the dynamic price is higher than the fair price, consumers’ fairness preferences of the price hikes will be triggered, prompting consumers to retaliate against the platform’s “hostile” behaviors
In a repeated game with consumer fairness preferences, prices are most likely to be reduced to the fair price
Summary
To match supply and demand more efficiently, platforms often apply dynamic pricing strategies. Taking into account the differences between repeated game and one-shot game, we derive the equilibrium strategies for platform companies and consumers in four different scenarios and their corresponding equilibrium prices Our research reveals both fairness preference and repeated game have an impact on dynamic pricing. Depending on whether to take fairness into account, and the difference between a one-shot game and repeated game, we obtain equilibrium strategies and equilibrium pricing for platform companies and consumers under the four different scenarios, and analyze the impact of fairness and long-term repeated game on dynamic pricing. Based on whether to take fairness factors into account or not, and whether to incorporate a repeated game or not, we obtain equilibrium strategies and equilibrium pricing for the consumer and the platform in four different situations. Formula (5) reveals positive impact of the consumption effectiveness my and negative impact of the price py of choosing “alternative goods/services” on its total utility, and the margin decreases with higher income
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