Pricing Mechanism

This section examines the perceived fairness of various pricing mechanisms.

Respondents considered various pricing mechanisms on the Internet to be fair,

including auction, group-buying discounts, the Priceline model and negotiation. They considered such practices to be even fairer when they enjoyed a low price than when they paid a high price.

5.3.1 Auction

A retail store, which found a Cabbage Patch doll unexpectedly, auctioned the doll to the highest bidder. This practice was considered unfair because the auction benefited the firm at the expense of the customer (Kahneman et al., 1986a). However, if the store were to declare that the proceeds from the auction were to go to UNICEF, the auction would be considered fair. Hence, the auction per se is not unfair, rather the perceived motive is being judged (Nelson, 2002). The following two questions examine the perceived fairness of an auction with an outcome that benefits either customers or the firm.

Question 3A. A resort hotel claimed that due to an economic slump its occupancy rate was very low and it had decided to auction off its rooms for a specific weekend on the Internet as a way of promoting itself. The going rate for the hotel is $100 per night. The hotel set a minimum bid price of $40. The final bid price turned out to be $70. How fair do you consider the auction of the hotel’s rooms?

Most of the respondents considered the auction fair (77.4% vs. 6.7%, Z= 7.27, p

< .001 for a two-tailed test).

Question 3B. A resort hotel claimed that due to a nearby sporting event, the demand for its rooms was going to be much higher than the supply. The hotel decided to auction off on the Internet some of its rooms for the week of the event. The hotel set a minimum bid price of $100, which was the actual going rate. The final bid price turned out to be $130. Is this auction of hotel rooms fair or unfair?

(N=101) Very fair 17.8% 31.7% 28.7% 11.9% 9.9% Very Unfair About half of the respondents (49.5%) thought that the auction was fair.

Although the percentage of respondents who considered the auction to be fair in this case is significantly lower than that in the previous scenario (49.5% vs. 77.4%, Z = -3.75, p < .001 for a one-tailed test), the respondents who considered this auction to be fair outnumbered those who considered it unfair (49.5% vs. 21.8%, Z = 3.90, p<.001 for a two-tailed test). Again, the auction appears to be acceptable.

The results differ from those obtained in response to Question 1A, in which demand did not increase but customers did not have another choice. The current scenario concerns an increase in demand, not a supply shortage. Raising prices due to (N=75) Very fair 42.7% 34.7% 16.0% 2.7% 4.0% Very Unfair

general demand conditions is more acceptable than doing so because customers having no other choice (Schein, 2002).

5.3.2 Group-buying discounts

Group-buying appeals to buyers in that the final price paid is probably lower than the purchase price of the same items at other posted-price retailers. Buyers can obtain a lower price as the size of the group of buyers increases, so consumers have an incentive to recruit other consumers, reducing the retailer’s customer acquisition cost.

However, a transaction can take days to complete as consumers wait for other buyers to join in the volume purchase. The time involved in completing the transaction is such that this pricing scheme may appeal only to deal-prone, price-sensitive

customers. Kauffman and Wang (2001) believed that group-buying business models lack key elements of sustainable competitive advantage. However, retailers can use this method to sell some of their units to generate interest and traffic at their websites, in the hope that consumers will remember the website and return for posted-price items. Such a pricing scheme does not guarantee that consumers enjoy prices lower than those on a posted-price website. Two scenarios are considered here – one with prices lower than the reference price, and another with a starting price that exceeds the reference price.

Question 4A. A resort hotel claimed that due to an economic slump, its occupancy rate was very low and it had decided to adopt a group-buying scheme to sell a weekend stay on the Internet. Suppose that the real actual going rate of a room is

$100. The price of a hotel room will depend on the number of rooms sold. The price schedule is as follows

Number of Rooms Sold Price 0-30 $100

31-60 $80

Over 61 $65

Restated, if fewer than 30 rooms are sold, the price per room would be $100.

However, if more than 31 rooms, but no more than 60 rooms are sold, the price per room would be $80. And if more than 61 rooms are sold, the price per room would be $65. Is this group-buying practice fair or unfair?

(N=100) Very fair 18% 39% 19% 19% 5% Very Unfair

Most respondents (57%) considered the group-buying discounts to be fair (57% vs.

24%, Z = 4.07, p <.001 for a two-tailed test).

Question 4B. [Same as above question]

Number of Rooms Sold Price 0-30 $110

31-60 $85

Over 61 $65

[Same as above question]

(N=75) Very fair 21.3% 32% 14.7% 26.7% 5.3% Very Unfair

Although the initial price exceeded the reference price, the respondents considered the group-buying discounts in this case to be equivalent (53.3% vs. 32%, Z = 2.16, p

= .03 for a two-tailed test).

The current scenario and the scenario in Question 4A do not differ significantly (53.3% vs. 57%, Z = .48, p = .31 for a one-tailed test). Apparently, group-buying is acceptable to respondents.

5.3.3 Priceline model

In the Priceline model, when consumers know about the price and do not obtain a good deal, they are likely to be frustrated. However, when consumers are uncertain or lack the knowledge to make an informed bid, they may become conservative in their estimates and bid very low prices, increasing the percentage of unsuccessful bids and frustrating consumers. The Priceline model attracts only those customers who are knowledgeable about prices and consistently bid low to get a good deal. Thus, the margins are likely to be thin, which fact contributed to the downfall of Warehouse Club, a subsidiary of Priceline. The Priceline model was tested with two scenarios:

one in which consumers obtain a price lower than the reference price, and another in which consumers must pay a higher price than the reference price. Consumers who obtain a price not higher than the reference price are expected to perceive the scheme to be fairer than those who have to pay a high price.

Question 5A. A hotel decided to adopt a pricing strategy that is similar to the Priceline model of pricing on the Internet; that is, you name a price and the hotel decides whether it would accept your offered price. If you make an offer and the hotel accepts, you cannot renege. You know a room in a similar hotel costs $100.

Suppose you offer $90 for a room for one night stay and that this bid was accepted. Is this pricing method fair or unfair?

(N=75) Very fair 30.7% 46.7% 9.3% 9.3% 4% Very Unfair

Most respondents considered the Priceline model to be fair when obtaining a price below the reference price (77.4% vs. 13.3%, Z = 6.12, p < .001 for a two-tailed test).

Question 5B. [Same as above] You know a room in a similar hotel costs $100.

Suppose you offer $90 for a room for one night’s stay and this bid was rejected.

Hotels in the vicinity area are full, so you go back to the hotel and offer $110 for a room. Now the hotel accepts your offer. Is this pricing method fair or unfair?

(N=101) Very fair 12.9% 30.7% 20.8% 21.8% 12.9% Very Unfair Roughly the same number of respondents perceived equivalent that the method is fair as compared with those who considered it unfair (43.6% vs. 34.7%, Z =1.14, p

= .25 for a two-tailed test). This is despite the fact that they must pay a higher price.

When respondents obtain a price below the reference price, they tend to consider the scheme fair, as shown by the responses to Question 5A. However, when they did not enjoy a low price, the proportion of respondents who considered the scheme fair dropped sharply. The drop is statistically significant (77.4% vs. 43.6%, Z = 4.49, p

< .001 for a one-tailed test).

5.3.4 Negotiation

Question 6. Suppose that you can negotiate price on the Internet, in a manner similar to negotiating for a new car. The seller gives you an asking price. You can accept or make a counter offer. The seller can accept your counter offer or make another offer. The process continues until either side quits or a price is agreed upon. You can negotiate with several vendors at the same time on the Internet. Furthermore, your offers are not binding. In other words, if a seller accepts your offer, you can still walk away with no obligation to purchase. Is this type of pricing method fair or unfair?

(N=75) Very fair 25.9% 22.4% 14.9% 24.1% 12.6% Very Unfair

Roughly the same number of respondents think that the method is fair as compared with those who think it is unfair (48.3% vs. 36.7%, Z = 1.18, p = .23 for a

two-tailed test). Intuitively, such negotiation would be considered to be very fair. That a large percentage of respondents considered the negotiation unfair is surprising.

Further questioning of the respondents revealed that they considered the procedure unfair because they felt that the buyer’s backing off after negotiating a price was unfair to the firm. Apparently, buyers’ considerations of fairness extend to the seller.

Buyers may feel uncomfortable if they feel that they are taking advantage of the seller.