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What makes a price fair ? An experimental study of transaction experience and endogenous fairness views

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  • Herz, Holger
  • Taubinsky, Dmitry

Abstract

People’s fairness preferences are an important constraint for what constitutes an acceptable economic transaction, yet little is known about how these preferences are formed. In this paper, we provide clean evidence that previous transactions play an important role in shaping perceptions of fairness. Buyers used to high market prices, for example, are more likely to perceive high prices as fair than buyers used to low market prices. Similarly, employees used to high wages are more likely to perceive low wages as unfair. Our data further allows us to decompose this history dependence into the effects of pure observation vs. the experience of payoff-relevant outcomes. We propose two classes of models of path-dependent fairness preferences -either based on endogenous fairness reference points or based on shifts in salience- that can account for our data. Structural estimates of both types of models imply a substantial deviation from existing history-independent models of fairness. Our results have implications for price discrimination, labor markets, and dynamic pricing.

Suggested Citation

  • Herz, Holger & Taubinsky, Dmitry, 2016. "What makes a price fair ? An experimental study of transaction experience and endogenous fairness views," FSES Working Papers 477, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  • Handle: RePEc:fri:fribow:fribow00477
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    References listed on IDEAS

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    3. Maniadis, Zacharias & Tufano, Fabio & List, John, 2013. "One swallow doesn’t make a summer: new evidence on anchoring effects," Discussion Paper Series In Economics And Econometrics 1314, Economics Division, School of Social Sciences, University of Southampton.
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    5. Skott, Peter, 2005. "Fairness as a source of hysteresis in employment and relative wages," Journal of Economic Behavior & Organization, Elsevier, vol. 57(3), pages 305-331, July.
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    Cited by:

    1. Dickson, Alex & Fongoni, Marco, 2019. "Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 409-429.
    2. Herz, Holger & Schmutzler, Armin & Volk, André, 2019. "Cooperation and mistrust in relational contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 366-380.
    3. Marco Fongoni, 2018. "Workers' reciprocity and the (ir)relevance of wage cyclicality for the volatility of job creation," Working Papers 1809, University of Strathclyde Business School, Department of Economics.

    More about this item

    Keywords

    Reference Points; Fairness; Salience; Bargaining; Endogenous Preferences; Price Stickiness;

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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