Bertrand supertraps under consumer fairness concerns

In industries such as electronics, furniture and athletic shoemaking, consumers tend to care about transaction fairness. If a firm obtains an extremely high profit margin relative to their surplus, consumers are less likely to purchase from this firm. A salient feature of such industries, however, is that firms commonly enjoy decreasing costs per unit with increasing cumulative output. This paper examines how the coexistence of consumer fairness concerns and decreasing costs impacts price competition among firms. Prior literature suggests that both consumer fairness concerns and scale economies heighten price competition. We show, however, that firms may set higher prices and obtain greater profit with stronger consumer fairness concerns in the presence of declining costs, because the indirect effect that consumer fairness concerns soften price competition caused by cost reductions may dominate the direct effect that they intensify price competition caused by product substitution. Furthermore, we show the robustness of our results by considering various situations, such as a general cost-reduction function, information asymmetry between consumers and firms, heterogeneity in consumers’ knowledge of firms’ cost structures, consumer heterogeneity in fairness concerns, and endogenous fairness concerns.