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A note on fairness and personalised pricing

Author

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  • Vulkan, Nir
  • Shem-Tov, Yotam

Abstract

Since the seminal papers of Fehr and Schmidt (1999) and Bolton and Ockenfels (2000), fairness has become an important discussion point in economics. Is it unfair that different people pay different prices for the same good or service? We provide what we believe to be a novel approach: We let normal everyday consumers play the role of sellers who have access to consumers’ data (and willingness to pay). A strong finding of behaviour in this setup is that subjects charge a fixed percentage (approximately 64%) of the willingness to pay from each of their subjects, leading to a fair, whilst uneven, distribution of prices. Interesting, this 64% price level does not change when we vary the number of sellers competing in the market.

Suggested Citation

  • Vulkan, Nir & Shem-Tov, Yotam, 2015. "A note on fairness and personalised pricing," Economics Letters, Elsevier, vol. 136(C), pages 179-183.
    • Handle: RePEc:eee:ecolet:v:136:y:2015:i:c:p:179-183
    DOI: 10.1016/j.econlet.2015.09.012
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    References listed on IDEAS

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    1. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(3), pages 817-868.
    2. Fischbacher, Urs & Fong, Christina M. & Fehr, Ernst, 2009. "Fairness, errors and the power of competition," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 527-545, October.
    3. Ernst Fehr & Martin Brown & Christian Zehnder, 2009. "On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity," Economic Journal, Royal Economic Society, vol. 119(536), pages 333-353, March.
    4. Martin Sefton & Abdullah Yavas & Eric Abrams, 2000. "An experimental comparison of two search models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 735-749.
    5. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    6. Alan L. Montgomery & Kartik Hosanagar & Ramayya Krishnan & Karen B. Clay, 2004. "Designing a Better Shopbot," Management Science, INFORMS, vol. 50(2), pages 189-206, February.
    7. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion In The Small And In The Large: Evidence From An Internet Price Comparison Site," Journal of Industrial Economics, Wiley Blackwell, vol. 52(4), pages 463-496, December.
    8. Dufwenberg, Martin & Gneezy, Uri, 2000. "Measuring Beliefs in an Experimental Lost Wallet Game," Games and Economic Behavior, Elsevier, vol. 30(2), pages 163-182, February.
    9. Alan L. Montgomery & Shibo Li & Kannan Srinivasan & John C. Liechty, 2004. "Modeling Online Browsing and Path Analysis Using Clickstream Data," Marketing Science, INFORMS, vol. 23(4), pages 579-595, November.
    10. Huang, Jen-Hung & Chang, Ching-Te & Chen, Cathy Yi-Hsuan, 2005. "Perceived fairness of pricing on the Internet," Journal of Economic Psychology, Elsevier, vol. 26(3), pages 343-361, June.
    11. Nir Vulkan, 2003. "Introduction to The Economics of E-Commerce: A Strategic Guide to Understanding and Designing the Online Marketplace," Introductory Chapters, in: The Economics of E-Commerce: A Strategic Guide to Understanding and Designing the Online Marketplace, Princeton University Press.
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    Cited by:

    1. Hendrik Sonnabend, 2016. "Fairness constraints on profit-seeking: evidence from the German club concert industry," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 40(4), pages 529-545, November.
    2. Kalyanaram, Gurumurthy & Winer, Russell S., 2022. "Behavioral response to price: Data-based insights and future research for retailing," Journal of Retailing, Elsevier, vol. 98(1), pages 46-70.
    3. Haucap, Justus, 2018. "Big Data aus wettbewerbs- und ordnungspolitischer Perspektive," DICE Ordnungspolitische Perspektiven 96, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    4. Haucap, Justus & Heimeshoff, Ulrich, 2017. "Ordnungspolitik in der digitalen Welt," DICE Ordnungspolitische Perspektiven 90, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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    More about this item

    Keywords

    Market design; Pricing; Fair Pricing;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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