Economics Seminar（2013-26）

Topic:Signaling through Price and Quality to Consumers with Fairness Concerns

Speaker: Baojun Jiang(//apps.olin.wustl.edu/faculty/Jiang/)

Affiliation: Washington University in St. Louis

Time: Tuesday, 26 Nov, 14:00-15:30pm
Location: Room217, Guanghua Building 2

Abstract：
Consumers with inequity aversion experience some psychological disutility when buying products at unfair prices. Empirical evidence and behavioral research suggest that consumers may perceive a firm's price as unfair when its profit margin is too high relative to consumers' surplus. In practice, however, consumers may be uncertain about the fairness of the firm's price, because they may not know the firm's cost even for search goods, whose quality is readily evaluated before purchase. Since inequity-averse consumers have a higher willingness-to-pay for any given quality when the firm's cost is higher, a cost-efficient firm may have an incentive to mimic an inefficient firm's pricing and quality strategies. We develop a game-theoretic model to investigate the effects of the consumer's inequity aversion on a firm's pricing and quality decisions. We highlight several interesting findings. First, because of the consumer's uncertainty about the firm's cost, the firm's optimal quality may be non-monotone with respect to the degree of the consumer's inequity aversion. Second, stronger inequity aversion makes an inefficient firm worse off, but may benefit an efficient firm. Third, we show that stronger inequity aversion by the consumer can actually lower the consumer's monetary payoff (economic surplus) because the firm may reduce its quality to a greater extent than it reduces its price. Lastly, as the average cost-efficiency in the market decreases, both the expected quality and the social welfare may increase rather than decrease.

Your participation is warmly welcomed!