Dolan and Moon (2000) discussed pricing mechanisms on the Internet. The mechanisms are of three fundamentally different types. Type I is the set price
mechanism, wherein the prices are set by the seller. Buyers are expected to “take it or leave it.” With this type of pricing, prices can be adjusted periodically, such as once every three months, or updated frequently, such as hourly or daily. Prices can also be customized for each buyer according to various rules that involve, for example, customer location, purchased history and click pattern. Type II is the negotiated price mechanism, wherein the buyer and the seller negotiate prices back and forth on the Internet. Type III is a class of mechanisms that rely on competition among buyers and sellers to produce prices. Type III consists of three subclasses – auction, reverse buying and exchange. In an auction system, the seller does not specify a price but rather provides an item, enabling buyers compete for the right to buy it in a bidding process. In a reverse buying system, the customer takes the lead in organizing the pricing process. For example, a buyer develops a Request for Proposal on an item or service, the price for which is determined in a competition involving bidding among potential sellers. In an exchange system, multiple buyers and multiple sellers come together in much the same way as at a stock exchange. Since an exchange system is rarely used in the transaction between a firm and its customers, its perceived fairness is not examined in this study.
Kannan and Kopalle (2001) derived the dynamic pricing on the Internet and studied the importance and implications for customers’ behavior. The pricing practices are more dynamic and timing, the participants involving seller and buyers of different aspects are from all-over the world, the content of the transactions are guite different
from the traditional posted-price styles. They compared the physical and virtual value chains and classified Internet dynamic pricing into three types of posted price.
Auction pricing and bundle pricing , including dynamic updating, posted price, dynamic e-coupons, auctions, priceline model, exchange, quantity discount model and bundled goods or services
From the previous papers, we probe the perceived fairness of pricing on the Internet from different pricing mechanisms and methods.
Kahneman et al ( 1986 a.b. ) used Q-methodology in studying the fairness pricing in transaction, and examined the increased market power, fair prices transaction by eighteen questions, and proposed the dual entitlement conception.
We aggregated and synthesized the pricing mechanisms and methods as five categories : increased market power, fair prices on the Internet, pricing mechanism, price discrimination and yield management.
3.1 Increased Market Power
When it was in special occurrence or shortage in market power, Kahneman (1986 a.b. ) found the increased market power as unfair. Campbell (1999 ) found the
increased market good or bad power based on motive or profit combined pricing and purchasing intention. Foley et al ( 1996 ) studied the wal-mart increased market power by pricing and competition factors.
3.2 Fair Prices on the Internet
Fairness played an important role in pricing and transactions. Campbell (1999 ) perceived unfair led to lower shopping intention. Feinberg et al ( 2000 ) examined
“ What you pay will be determined by where you live or who you are “ Freg and
Pommerehne ( 1993 ) indicated a rise in price to copy with excess demand is considered unfair. Huang ( 2001 ) examined the commitment, trust, fairness and purchasing intention on unethical behaviors of web-sites, Kachelmeier et al ( 1991 ) suggested that fairness can affect market prices, but the effect decline over time, the purchase behavior not only on monetary incentives, but also consider of fairness.
Kimes ( 2002 ) discovered fair behavior is instrumental to the maximization of long-run profits. Piron and Fernandez ( 1995 ) found it was a large loss when unfairness happened. Schein ( 2001 ) probed the fairness of Isarel housing market.
Tang and Xing ( 2001 ) compared the traditional retailers pricing and the Internet retailers pricing and revealed that the prices of Interent retailers are lower than the traditional retailers’ pricing.
3.3 Pricing Mechanism
Geng et al ( 2001 ) stressed the on-line auction and the auction based radically new product introductory frame work. Kauffman and Wang ( 2001 ) described the bidding and auction theory, group-buying discounts, on-line retailing and
Internet-based electronic market.
Kannan and Kopalle ( 2001 ) explained the price methods on the Internet.
Kristensen ( 2000 ) found that fair price play an important role in negotiation.
Maxwell et al ( 1999 ) found that with fairness and price negotiation, a seller can increase a buyer’s satisfaction without sacrificing profit. Molm et al ( 2003 ) discussed the implications for theory and for negotiation. Wang ( 1993 ) studied the auction vs posted-price selling.
The price mechanisms we examined here with perception of fairness on the Internet are : auction, group-buying discounts, price-line model and negotiation.
3.4 Price Discrimination
In Type 1 price system, the seller sets the price. All three types of discrimination discussed by economists can be applied because prices can be easily adjusted.
Practicing first-degree discrimination, a seller can offer a price based on a customer’s past purchases and mailing address, skimming as much as possible from each buyer.
Firms practice second-degree discrimination by setting prices according to the quantity purchased. Practicing third-degree discrimination, a seller can offer a price based on geographical areas or on a customer’s price sensitivity. When a customer logs into q website through a price comparison site, a lower price can be posted.
Furthermore, the seller can change prices according to specified rules, such as random discounting, and discounting to new customers. Customers would consider some of these pricing practices fairer then others.
Feinberg et al ( 2000 ) pointed out the Internet was supposed to empower customers, and the pricing in Internet based on customer’s history, and personal information. Foley et al ( 1996 ) found the wal-mart adopted the different discounting in different location. Anonymous ( 1999 ) indicated that it is very easy to perform the dynamic pricing of price discrimination based on customer’s data : income level, buying habit, and customers’ address.
What we choose the survey items of price discrimination are : random, couponing discounts, geographic discrimination, discounting to new or loyal customers and discrimination based on price sensitivity.
3.5 Yield Management
Yield management, unlike any of the price discrimination methods mentioned above, involves temporal consideration in changing prices. Airlines frequently sell tickets at lower prices when reservations are made months before departures, but charge higher prices for tickets purchased one or two days ahead. On the Internet, yield management is easy to implement. The posted prices can be adjusted continually based on current demand situations and the time to receipt of service. However, customers usually do not know how the seller adjusts prices, but the may notice that prices differ each time they log into the website. Kimes ( 2002 ) found that the yield management seems to be fair.
3.6 The Framework of the Survey
From the previous traditional and dynamic Internet pricing, we propose the survey and examination framework of this study as Figure 3.
Survey
Increased Fair Pricing Price Yield
Market Prices on Mechanism Discrimination Management
Power the Internet
Auction Group- Priceline Negotiation Buying Model
Discounts
Random Couponing Discrimination
Discount Geographic based on Price
Discrimination Sensitivity
Discounting to New or Loyal Customers
Figure 3. The Framework of the Survey of Perceived Fairness of Pricing on the Internet