Pricing and Fairness: Do your customers assume you are gouging them? (page 1 of 2)

Yet it's easy to find others who will tell you they take rampant industry greed as a given. Some people are convinced, for example, that pharmaceutical companies make obscenely high profits on patent-protected drugs, that gasoline prices are exorbitant and determined more by industry collusion than market forces, that restaurants gouge patrons by selling wine at exorbitant prices.

The prevalence of such beliefs - regardless of their validity - led Wharton marketing professor Lisa Bolton and two fellow researchers to wonder if, in fact, U.S. consumers believe they get a fair shake from the businesses they regularly patronize, whether they are buying designer coats, frozen dinners, or DVD players. Moreover, how thorough is the average consumers' understanding of the American capitalist marketplace? The researchers - Bolton, marketing professor Joseph Alba of the University of Florida, and business professor Luk Warlop of Katholieke Universiteit, Leuven - describe the results of their experiments in a new paper, "Consumer Perceptions of Price (Un)Fairness." The paper is forthcoming in the Journal of Consumer Research.Bolton concludes that "there is a general perception that prices are unfair, and that companies - not just retailers, but firms in general - make a lot of profit." The study, she says, points to a gap between how customers think and how managers think, a gap which managers should acknowledge if they want to give customers a sense of being treated equitably.

In a series of 10 experiments, the authors presented 1,100 college students with various pricing scenarios. For example, respondents were asked to consider the past price of a polo shirt and to judge if the current higher price was fair. They also considered the price of a pint of ice cream at a grocery store and one at a convenience store. In other experiments, participants made judgments and assessed price fairness about clothing at a department store and a discount store. They were invited to guess at probable prices, cost of goods sold, other costs, and profits.

Besides assessing participants' thoughts and feelings about pricing, the researchers wanted to see if providing information about a store's costs or advantages might alter judgments of fair pricing. They presented different versions of the same question, for example including a phrase like, "You notice the department store has more selection and service and a pleasanter in-store environment." Some questions made reference to retail considerations such as labor, rent, maintenance, high-fashion inventory, administration, and promotion. Says Bolton, "We tried cueing various costs; we focused a lot on labor since it's such an obvious big one. We did one experiment where we looked at markdowns and rent - less obvious costs - to see if reminding people of other costs incurred by the firm would improve their perceptions of price fairness."

The findings suggested to the researchers that shoppers do tend to believe prices are unfair. Participants routinely assumed that companies gouge customers and reap large profits (estimated at around 30% across the survey). They tended to attribute store price differences to pure profit rather than to costs or business strategy choices. They systematically underestimated the effects of inflation - even when provided with explicit inflation rates, current prices, and historical data - and frequently ignored cost categories other than the cost of goods sold.