The Price of Power: How Firm’s Market Power Affects Perceived Fairness of Price Increases

Abstract

How does market power affect consumer perceptions and purchase behavior? In the theoretically and pragmatically important context of price increases, we theorize that (i) consumer price fairness perceptions decline with market power when a price increase is due to costs; and (ii) this fairness difference arises due to greater perceptions of controllability and, in turn, exploitation by firms with higher market power. Consistent with our theorizing, we further argue that market power does not affect fairness (iii) when prices rise due to demand (which is perceived as equally exploitative and unfair regardless of firm power) or (iv) when price increases are clearly beyond the firm’s control (and perceived as equally fair for firms with high and low market power). We provide empirical support for these predictions in a series of behavioral experiments combined with an analysis of retail scanner data. Together, our findings shed light on how market power and pricing actions jointly drive consumer perceptions of unfairness, with implications for firms’ pricing strategies, competition in the retail marketplace, and the principle of dual entitlement as a community standard of fairness in pricing.