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Pricing strategy & practice
Transparency in pricing and its effect on
perceived price fairness
Jodie L. Ferguson
Virginia Commonwealth University, Richmond, Virginia, USA, and
Pam Scholder Ellen
Georgia State University, Atlanta, Georgia, USA
Abstract
Purpose – This research aims to examine the effects of transparency in pricing (i.e. disclosure of a price increase and extent of explanation) on
perceived price fairness when a firm increases price.
Design/methodology/approach – US adult consumer panelists participated in two online experiments.
Findings – Consumers perceive a firm’s price increase as more fair when the firm discloses the increase itself as compared to an outside source
disclosing it. For a small price increase, a limited explanation was perceived as more fair; for a larger price increase, a more detailed aligned cost
explanation was perceived as more fair.
Research limitations/implications – Firms who must raise prices may increase consumer perceptions of price fairness by disclosing the price
increase and providing an appropriate explanation matched to the size of the increase.
Originality/value – This research focuses on the effects of being more transparent about pricing in the case of a price increase. Perceived price
fairness is affected by who discloses the price increase, the amount of the price increase and the extent to which reasons are revealed and aligned with
the firm’s costs.
Keywords Alignable costs, Price fairness, Transparency in pricing
Paper type Research paper
An executive summary for managers and executive
readers can be found at the end of this article.
To judge the fairness of a price, a consumer may judge the
price according to the derived value, the price relative to other
prices (i.e. those offered by competitors or paid by other
customers), and/or the fairness of the price-setting practice.
In other words, they can judge a price by the outcome fairness
(i.e. the price offered) as well as by the procedural fairness
(i.e. the method for establishing the price or price changes).
In the marketplace, information about the offered price, such
as competitors’ prices, advertised prices, and prices paid by
others, is more readily available than the means used to set
prices. Thus, there is greater transparency about the price
itself than transparency in pricing.
A price increase represents a change in the offered price as
well as a price-setting practice. While a newly posted price
may or may not be noticed by consumers in practice, some
firms proactively disclose price increases, including
McDonald’s (Ziobro, 2010), American Airlines (Dallas
Business Journal, 2010), and Tropicana (Sellen, 2010),
likely expecting that the consumer or business press will do so
if they do not. However, firms may be reluctant to announce
price increases because customers universally prefer a lower
price and attention to the price allows customers to question
anew the price of the product or service. For example, Bertini
and Gourville (2012) note the substantial loss in customers
when companies like Bank of America, Netflix and Marks
& Spencer announced price changes that consumers
considered unfair. In an age of social media, such
announcements may spark a more widespread consumer
focus on pricing practices. These authors found the social
media traffic spiked when Apple announced the price for the
latest iPad and the repricing of the iPad2.
Failing to be transparent about pricing may foster distrust.
“While a firm’s brand communications may say, ‘We value
you as a person,’ its pricing practices often say, ‘We value you
as a wallet.’ Customers instantly pick up on the inconsistency
and respond accordingly” (Bertini and Gourville, 2012,
p. 99). Customers may view secrecy about pricing practices as
another layer of unfairness (Kimes, 2002). Therefore,
understanding when to disclose pricing information and
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1061-0421.htm
Journal of Product & Brand Management
22/5/6 (2013) 404– 412
qEmerald Group Publishing Limited [ISSN 1061-0421]
[DOI 10.1108/JPBM-06-2013-0323]
Received 5 June 2013
Revised 18 July 2013
Accepted 20 July 2013
404
what information to disclose is essential to lessening negative
consumer response, particularly when pricing in a down
economy (e.g. Robison, 2008).
When retailers are confronted with rising costs or market
demands, raising prices may seem necessary or called for. Not
surprisingly, a consumer is more likely to judge a higher than
expected price to be more unfair than a lower price (Maxwell,
2005; Huppertz et al., 1978). However, consumers will judge
prices as more fair when they believe that higher prices reflect
the seller’s costs and not an increase in the seller’s relative
profit levels (Kahneman et al., 1986), that the seller’s cost
increases and price increases are aligned with the product or
service offered (Bolton and Alba, 2006), and that factors
outside the seller’s control have caused the higher prices
(Vaidyanathan and Aggarwal, 2003).
The purpose of this research is to examine how consumers
judge an announced price increase, depending on the source
of the announcement and the degree and alignment of the
explanation for the increase. As such, it responds to calls in
prior research to test the effects of transparency in pricing on
perceptions of price fairness (e.g. Campbell, 1999; Heyman
and Mellers, 2008; Maxwell, 2005). It extends previous
research on the effects of the source of pricing information
(e.g. Campbell, 2007), cost alignment explanations
(e.g. extending Bolton and Alba, 2006), and effects of
amount of information provided. It also adds to the literature
on price increases by examining how magnitude of price
increase affects the relationship between extent of price
increase information and perceived price fairness
(e.g. Huppertz et al., 1978). In the first of two experiments,
the effect of source of the price increase (e.g. firm or media)
on perceived price fairness is examined. The second study
looks at the combined effects of extent of information
disclosed and magnitude of price increase. As in prior
research (e.g. Kahneman et al., 1986), we use hypothetical
scenarios to test effects on price fairness.
Transparency in pricing
Heyman and Mellers (2008) argue that consumers should
know how prices are set to allow them to judge whether
practices are adhering to social norms. Recent health care and
financial reform measures address providing more
transparency in pricing, such as the Credit CARD Act of
2010 that requires firms to provide reasons for raising
consumer interest rates (Consumer Financial Protection
Bureau, 2011). When the consumer is presented with a
price increase, transparency in pricing may help the consumer
to understand the economic rationality of the seller’s decision
to set that price (Maxwell, 1995).
While transparency purportedly engages customers and
“builds trust and goodwill among customers” (Bertini and
Gourville, 2012, p. 103), the question for firms is the degree
of transparency. Transparency could range from clearly
providing the true outcome price to the customer, such as
the price of an airline ticket plus all applicable taxes and fees
as well as standard luggage, to full information on the pricing
process the firm uses (Bertini and Gourville, 2012), such as
occurs with auctions. How consumers interpret provided
information may be explained by attribution theor y, where
observers use information about an actor’s behavior or the
circumstances under which the behavior was performed to
make an inference about the causal factor (Weiner, 2000).
Thus, consumers use available information (e.g. the retailer’s
past behaviors, other retailers’ behavior, marketplace factors
such as media coverage) to make inferences about the how
and why a price has changed (Monroe and Xia, 2006).
Degree of transparency in pricing decisions involves
considering the extent of information disclosed, such as a
reason or motive for the pricing decision and the amount of
detail provided. With less information from the firm itself,
consumers may be making correct or incorrect inferences
about the motives for pricing decisions (Campbell, 1999). By
providing reasonable or justifiable explanations for pricing
decisions, firms may be able to gain customer understanding
or avoid incorrect inferences of motive. Carter and Curry
(2010) found that when details about allocation of proceeds
were revealed, customers were willing to buy more expensive
items. However, providing less justifiable explanations for
pricing changes could result in negative consumer responses
as occurred with Netflix (Mohammed, 2012). The challenge
for firms is to determine the extent of explanation to disclose
to limit negative consumer response.
Information about pricing changes can be initiated by the
firm or can be exposed by mainstream media, social media, or
customers. Once pricing changes are public, firms can choose
to provide reasons for pricing structure changes or price
increases. “A firm that is less transparent signals that it has
something to hide, distancing itself from customers and
putting both parties on the defensive” (Bertini and Gour ville,
2012, p. 103). Thus, firms have the choice to be proactive in
providing information themselves or be reactive if such price
changes are publicized by others.
Transparency in pricing and perceived price
fairness
Disclosure of price increase
Price increases can be difficult for sellers to implement
because price increases can generate negative consumer
responses (Homburg et al., 2005). Sellers may avoid negative
responses by controlling the way in which consumers find out
about a price increase. The source of pricing information
(e.g. human or nonhuman) has an effect on price fairness
perceptions (Campbell, 2007). Amazon.com did not reveal a
dynamic pricing strategy that charged variable prices for the
same DVD based on consumer characteristics. Once exposed,
consumer anger forced Amazon to cease the dynamic pricing
strategy and publicly apologize (Wolverton, 2000). The
secretiveness of Amazon’s pricing structure may have fueled
the negative response. Previous research has found some
effect of transparency in pricing strategies on judgments of
fairness. For example, partitioned pricing, where the seller
provides prices for individual components of a product’s total
price can lead to greater fairness perceptions, possibly due to
the transparency of the make-up of the price (Carlson and
Weathers, 2008). Therefore, we propose:
H1. Proactively disclosing a price increase will result in
more positive perceived price fairness than a price
increase disclosed by an external source.
Extent of information disclosed
Providing a reason for price increase. Monroe and Xia (2006)
suggest that in order to avoid misinterpretations of a seller’s
intent and actions, sellers should reveal the reasoning behind
Transparency in pricing and its effect on perceived price fairness
Jodie L. Ferguson and Pam Scholder Ellen
Journal of Product & Brand Management
Volume 22 · Number 5/6 · 2013 · 404 – 412
405
pricing decisions. Providing no reason or explanation for price
increases, no matter the magnitude of price increase, may
leave consumers to wonder what the motive for the price
increase might be. In fact, Campbell (1999) found that
providing no reason can lead to negative inferences and
subsequent perceptions of price unfairness. Additionally, if
there are peripheral cues such as plausible negative motives
for a price increase, consumers may become suspicious, which
can result in increased perceived price unfairness (Ferguson
et al., 2011). Bearden et al. (2003) found that providing the
seller’s costs (i.e. invoice prices) can increase perceived offer
fairness. Urbany et al. (1989) found that describing a cost-
justified ATM fee is perceived as more fair than a description
without the cost-justification. Thus, we propose:
H2. Providing a reason for a price increase results in more
positive perceived price fairness than not providing a
reason.
Magnitude of price increase. Consumers judge higher than
expected prices to be unfair (Hupper tz et al., 1978) and more
consumers judge a larger price increase to be unfair than a
lower price increase (Maxwell, 1995). It is likely that when a
firm discloses a price increase, the larger the price increase
magnitude, the more unfair the price increase will be
perceived. We also expect that magnitude of price increase
influences the relationship between extent of information
disclosed and perceptions of price fairness.
Amount of information disclosed. In the advertising literature,
resource-matching theory suggests that persuasion and its
outcomes (e.g. positive brand thoughts) is greatest when the
supply of cognitive resources (i.e. information) matches the
cognitive resources required to process a message (Peracchio
and Meyers-Levy, 1997). For example, when a small
magnitude price increase is announced, the small increase
may be consistent with business norms and consumers might
expect limited information (e.g. due to cost increases) to
judge the fairness of the price. If an excess of cognitive
resources is provided in the small increase scenario, the excess
information may bring about greater elaboration and negative
thoughts (e.g. counter argumentation) (Mantel and Kellaris,
2003). On the other hand, if a large magnitude price increase
is announced, the larger price increase may be unexpected
and consumers may need more information (e.g. greater
detail about cost increases) to judge the fairness of the price.
If there is a shortage of information in the large increase
scenario, individuals may rely on heuristics or peripheral cues
to judge the price.
Rather than a detailed explanation for a small price
increase, a firm might provide a limited explanation
(e.g. simply due to higher costs). The consumer may
reasonably assume that such a firm-initiated public
announcement of a price increase is due to alignable costs.
Limited explanations may provide just enough information to
show that the price increase is externally caused and
uncontrollable to the business (Vaidyanathan and Aggarwal,
2003), but limit the cognitive resources needed to process it,
reducing excessive elaboration or negative thoughts (Mantel
and Kellaris, 2003).
H3. For a smaller price increase, perceived price fairness
will be more positive when limited information is
disclosed than when more detailed information is
disclosed.
Alignment of reason for price increase. Dual entitlement theory
argues that a price increase is likely perceived as more fair
when customers believe that the seller has had an increase in
their costs to provide the associated product or service
(Kahneman et al., 1986), particularly when the increased
costs are externally caused and uncontrollable (Vaidyanathan
and Aggarwal, 2003). Price increases associated with an
alignable cost increase are perceived as more fair (Bolton and
Alba, 2006). For example, when Starbucks announced a price
increase on brewed coffee in 2012, the increase was described
to be due to increased commodity costs (Gasparro, 2012).
However, when a price increase is a function of a nonalignable
cost increase, this transparency in pricing may be break with
consumer expectations that the increase should be justifiable
(Heyman and Mellers, 2008), leading to greater perceived
price unfairness. In particular, when an explanation includes
increased costs that are inherent costs of doing business, but
not directly alignable with a price increase on that product or
service, customers may not see these as good justification for
increasing the price.
H4. For a larger price increase, perceived price fairness will
be more positive when the disclosed information is
detailed and includes a cost increase alignable with the
product than when it is not alignable.
Two experiments were conducted to test the four hypotheses.
Study 1 examines the first hypothesis, whether firm disclosure
of a price increase brings about more positive price fairness
perceptions. Study 2 tests H2,H3 and H4, including effects of
providing a reason for price increase, effects of amount of
information provided, and effects of alignable costs on
perceptions of price fairness.
Study 1
Study 1 manipulated whether the price increase was disclosed
by the firm itself or by a source outside the firm (e.g. the
media). A mock news article about a coffee company raising
prices on coffee products was used as the guise for the
manipulation. Such media stories have appeared, often based
on press releases from firms choosing to be transparent in
price changes. For example, Starbucks recently put out a
press release announcing a price increase that was reported by
the Wall Street Journal (Gasparro, 2012). To make it as
realistic as possible, the mock article mirrored an actual
Associated Press article in which a major coffee chain
announced a price increase. To control for prior exposure, any
respondents who recalled having heard about a coffee chain
announcing a price increase were excluded post hoc.
To manipulate disclosure of the price increase, half of the
respondents saw an article that stated that a fictional coffee
shop, “Betty’s Buzz,” announced a price increase (i.e. firm
disclosure of price increase) on cappuccinos, lattes, drip
coffee and other drinks by 5 cents. The other half saw an
article that announced the price increase but stated that the
price increase was not announced by the firm itself (i.e. no
disclosure of price increase), but the firm was contacted by
the source for comment. The reason for the price increase,
“costs have gone up,” was held constant in both. Appendix A
provides the experimental scenarios. Following the scenario
were two seven-point manipulation check questions and three
nine-point semantic differential items measuring perceived
price fairness (i.e. very unfair/very fair, not very reasonable/
Transparency in pricing and its effect on perceived price fairness
Jodie L. Ferguson and Pam Scholder Ellen
Journal of Product & Brand Management
Volume 22 · Number 5/6 · 2013 · 404 – 412
406
very reasonable, and not very justified/very justified,
a
¼0:95) (e.g. Bolton et al., 2010).
Sample
A total of 57 adult (i.e. over age 18) US consumers were
recruited from Amazon Mechanical Turk and were paid $.75
to participate in the experiment (Buhrmester et al., 2011).
Attention filter questions, as recommended by Paolacci et al.
(2010), were included to identify and exclude respondents
who were not paying attention to the task. Cell sizes were 27
and 30. Of the participants 51 percent were female and the
average age was 33 (s:d:¼12:8). The respondents were also
geographically diverse, with 26 percent responding from the
Midwest, 25 percent responding from the Southwest, 14
percent from the Mid-Atlantic, and 21 percent from the
Southeast. Seventy-seven percent of the respondents drank
coffee with an average of 6.2 cups a week (s:d:¼7:6). There
was no significant difference in perceived price fairness based
on amount of coffee consumed ( p.0.05).
Results
To determine that manipulations were perceived as intended,
respondents were asked the degree of control the firm had in
the story, using the following two seven-point semantic
differential items: “How much control do you think Betty’s
Buzz had over making the price increase public [...]Very little
control – A lot of control,” and “To what extent was
the price increase announced by [...] Betty’s Buzz –
Someone else.” Independent sample t-tests indicated that
the disclosure group was significantly higher than the no
disclosure group for the control manipulation item
(M
disclosure
¼4.50, M
no_disclosure
¼3.37, t¼22.44, df ¼55,
p,0.05) and the disclosure group was significantly lower in
the source price increase announcement question
(M
disclosure
¼3.60, M
no_disclosure
¼4.70, t¼1.80, df ¼55,
p,0.05). Both items indicated that the manipulation worked
as intended.
The three items of perceived price fairness were averaged
and used as the dependent variable in an independent sample
t-test to test H1. The t-test was significant and the means were
as predicted (M
disclosure
¼7.19, M
nodisclosure
¼6.28,
t¼22.44, df ¼55, p,0.05). Thus, our data suppor ts the
hypothesis that disclosing a price increase brings about greater
perceived price fairness than when disclosed by a source
outside the firm. Study 2 continues to explore transparency in
pricing by examining the extent of information provided by
the firm, as well as, the effects of magnitude of price level.
Study 2
Study 2 was a 4 (extent of information) £2 (price increase
magnitude) online experiment. Variations of the same
scenario used in Study 1 featured a news article for Betty’s
Buzz increasing prices. All of the scenarios featured the firm
disclosing the price increase. To control for strong loyalty to
other retailers, the scenario asked respondents to imagine that
Betty’s Buzz was a place they had visited a few times. To
manipulate the extent of information disclosed about the
price increase, respondents were randomly assigned to one of
four conditions – a control in which no reason was provided,
a limited reason condition (i.e. due to increased costs), and
two detailed reason conditions, an alignable cost explanation
and a non-alignable cost explanation. The aligned price
increase was described as due to increased costs of the
product itself (i.e. greater demand for coffee and shortage of
coffee beans). In the nonalignable or indirect condition, the
cost increase was described as increased transportation costs
for supplies due to higher fuel prices.
For the magnitude of price increase manipulation, one half
of the respondents saw a 2 percent price increase on coffee
products and the other half of the respondents saw a 20
percent increase on coffee products. Following the scenario
were three manipulation check questions and the three-item
price fairness perception measures (
a
¼0:95), the same as
used in Study 1.
Sample
A total of 195 adult US consumers were recruited from
Amazon Mechanical Turk and were paid $0.75 to participate
in the experiment. Cell sizes were between 22 and 26. Of the
participants 54 percent were male and the average age was 35
(s:d:¼11:4). The respondents were geographically diverse,
with 17 percent responding from the Midwest, 28 percent
from the Southwest, 13 percent from the Mid-Atlantic, 23
percent from the Southeast, and 15 percent from Northeast.
Of the respondents 74 percent drank an average of 7.65 cups
of coffee a week (s:d:¼8:8). There was no significant
difference in perceived price fairness based on amount of
coffee consumed (p.005).
Results
To assess the manipulation of the extent of information
provided, two seven-point semantic differential questions
were asked: “To what extent would you say the reason for the
price increase was [...] not explained – well-explained and
due to direct costs of their products – Due to indirect costs of
their products.” A univariate analysis of variance was
conducted with both factors included (extent of information
and price magnitude) to test the first manipulation (i.e. not
explained – well-explained) for the amount of information
provided. Only the direct effect of extent of information (not
price magnitude or interaction) was significant
(F¼50:15;df ¼3;p,0:01), which rules out crossover
effects. The Duncan post hoc test revealed three significantly
different subsets: no reason, limited reason, and detailed
reason (alignable and nonalignable included on same subset),
with means demonstrating the expected direction
(M
no_reason
¼2.06, M
limited
¼3.08, M
detailed(alignable)
¼4.62,
M
detailed(nonalignable)
¼5.02). For the second extent of
information manipulation check (i.e. due to direct costs of
products – due to indirect costs of products), both factors
were again included in a univariate analysis of variance, and
again, only the significant main effect of extent of information
was significant (F¼115:23;df ¼3;p,001) and not price
magnitude or interaction, ruling out crossover effects. The
Duncan post hoc test revealed three significantly differet
subsets: detailed alignable cost condition
(MdetailedðalignableÞ¼2:15), nonalig nable cost condition
(MdetailedðnonalignableÞ¼6:49), and both no reason condition
and limited reason were in the same middle subset
(Mno_reason ¼3:62;Mlimited ¼3:16). Thus , the extent of
information manipulations were successful.
For the magnitude of price increase manipulation, a seven-
point question asked “Would you describe the price increase
as [...] a very small percentage – a very large percentage.” An
independent sample Z-test revealed that respondents who saw
Transparency in pricing and its effect on perceived price fairness
Jodie L. Ferguson and Pam Scholder Ellen
Journal of Product & Brand Management
Volume 22 · Number 5/6 · 2013 · 404 – 412
407
the 2 percent price increase condition (M2%¼2:45) rated the
price increase as significantly smaller than those who saw the
20 percent price increase condition (M20%¼4:32)
(Z ¼27:95;p,0:01). Therefore, the magnitude of price
level manipulation was also successful.
A univariate analysis of variance was conducted to test the
main effects of extent of information and price increase
magnitude and an interaction effect on perceived price
fairness. Table I provides the price fairness means and
standard deviations of each of the experimental cells and
Figure 1 illustrates the interaction between extent of
information and price increase magnitude. The main effects
of extent of information (F¼3:86;df ¼3;p,0:01) and of
price increase magnitude (F¼50:62;df ¼1;p,0:01) on
perceived price fairness were both significant. Supporting H2,
price fairness was significantly lower in the no reason
condition (Mno_reason ¼5:15) than the three other reason
conditions (M
limited
¼5.91/M
detailed(alignable)
¼5.94/
M
detailed(nonalignable)
¼5.96). The interaction term was also
significant (F¼19:42;df ¼3;p,0:01), meaning that the
interaction of extent of information by price increase
magnitude was significant. While a smaller price increase
was considered more fair than a larger price increase,
perceived price fairness depended on the extent of
information. The Duncan post hoc test revealed two
significantly different subsets.
Hypothesis 3 stated when the price increase is smaller,
perceived price fairness will be greater when the extent of
information for the price increase is limited than when the
extent of information is more detailed. To test the third
hypothesis, an analysis of variance was used, isolating the 2
percent price increase conditions. The extent of information
factor significantly affected price fairness perceptions
(F¼10:57;df ¼3;p,0:01). An LSD post hoc test revealed
the limited reason condition led to more positive price fairness
perceptions than the more detailed alignable reason
(Mdifference ¼1:68;p,0:01), providing partial support for
Hypothesis 3. However, the limited reason condition was not
significantly different than the detailed nonalignable reason
(Mdifference ¼20:13;p.0:05), meaning that the detailed,
alignable cost explanation led to more negative perceived
price fairness than any of the other conditions. Based on the
resource-matching hypothesis, this may be because the over-
explanation of a small magnitude price increase leads
consumers to question the reason for such a lengthy
explanation, while consumers feel the lengthier nonalignable
cost increase explanation is necessary because it is an
unexpected reason and consumers may welcome the extra
information. A final question on the survey asked about the
truthfulness of the explanations. An independent sample t-
test revealed that, in the smaller price increase condition,
the more detailed, alignable reason led people to doubt
the truthfulness of the statement compared to the
detailed, nonalignable reason (M
detailed(alignable)
¼3.20,
M
detailed(nonalignable)
¼2.08, t¼2.85, df ¼40.1, p,0.01).
Thus, when the price increase is smaller, perceived price
fairness is higher when the firm provides a nonalignable
(e.g. due to transportation costs) reason for the price increase
than an alignable (e.g. due to product ingredient costs)
reason.
Hypothesis 4 states that a larger price increase will lead to
more positive perceived price fairness when the disclosed
information is a detailed alignable reason rather than a non-
alignable reason. To test Hypothesis 4, analysis of variance
revealed a significant effect of extent of information on price
fairness (F¼11:98;df ¼3;p,0:01) in the 20 percent price
increase condition. The LSD post hoc test showed support for
H4 in that the detailed alignable reason condition brought
Table I Price fairness means by extent of information disclosed
2 percent price increase
condition
20 percent price increase
condition
M SD M SD
No reason provided 6.49 1.12 3.81 1.69
Limited reason provided 7.01 1.42 4.85 1.53
Detailed reason provided:
Alignable cost increase 5.33 1.30 6.62 1.03
Nonalignable cost increase 7.14 1.18 4.74 1.75
Figure 1 Price fairness means by extent of information disclosed
Transparency in pricing and its effect on perceived price fairness
Jodie L. Ferguson and Pam Scholder Ellen
Journal of Product & Brand Management
Volume 22 · Number 5/6 · 2013 · 404 – 412
408
about significantly greater price fairness than the detailed
nonalignable reason condition (Mdifference ¼1:88;p,0:01).
Although not hypothesized, the detailed alignable reason
condition also brought about greater price fairness than the
limited reason condition (Mdifference ¼1:77;p,0:01) and the
no reason condition (Mdifference ¼2:81;p,0:01) for the
higher price increase condition.
Discussion
The results of the current research empirically tests previous
researchers’ suggestions that providing information about the
cause of a price increase can improve consumer perceptions of
the fairness of a price (Heyman and Mellers, 2008; Maxwell,
2005). This research extends Campbell’s (2007) finding
about human and non-human sources by showing that
announcements by the firm, as compared to an external
source, positively affected price fairness. Our price magnitude
findings extend Hardesty and Suter’s (2005) research that
finds price perceptions are affected by reference price levels,
as well as brick-and-mortar/online contexts. Additionally, the
findings extend Bolton and Alba’s (2006) research on the
alignability of cost increases and price fairness by examining
how price increase magnitude and extent of information
disclosed combine to affect price fairness perceptions.
These two studies provide evidence that transparency in
pricing does have an impact on perceptions of price fairness.
Specifically, perceived price fairness is significantly affected by
whether price increases are announced by the firm and
whether a reason for the price increase is included.
Additionally, the combination of price increase magnitude
and extent of information provided also affects perceived
price fairness. When the price increase is smaller, keeping the
explanation for the price increase short (i.e. limited reason)
brings about greater price fairness than a more detailed,
alignable cost (e.g. product ingredient costs). When the price
increase is larger and the firm discloses a more detailed
explanation for the price increase citing alignable cost
increases (e.g. product ingredient costs), consumers will see
the price increase as more fair than citing a nonalignable cost
increase (e.g. transportation costs).
An unexpected finding was that when a price increase is
smaller, there is no difference in price fairness between a
limited reason and a detailed, nonalignable reason.
Additionally, perceived price fairness is greater when a
detailed, nonalignable reason is provide than a detailed,
alignable reason. An explanation for this may be that when
the price increase is small, consumers do not devote cognitive
energy to evaluate the extent of the reason and may simply be
glossing over the nonalignable cost explanation. When
detailed alignable cost reasons are provided, consumers may
see the additional explanation as over-explaining and may
question the truthfulness of the explanation. An additional
question about the truthfulness of the explanation
demonstrated this.
Implications
Vaidyanathan and Aggarwal (2003) suggest that if sellers want
to positively influence consumer perceptions, sellers need to
highlight the causes behind the increase. Our research
suggests that marketers should carefully consider the extent
of information provided and the reason provided when
revealing information about pricing decisions. Consumers are
well-informed and may discover price increases even when
firms attempt to usher in price increases discretely. Once a
price increase is made public, the seller will need to be ready
in case of public or customer response, to provide some
transparency about their pricing. For example, a British
retailer who began charging £2.00 extra for bras with large
cups was forced to publicly defend the pricing practice by
citing higher cost of goods, an alignable cost reason but one
that was discriminatory for some customers (Bertini and
Gourville, 2012). The retailer returned to the one-price-fits-
all price.
Our results show that when a price increase is small, higher
perceived price fairness results when sellers disclose a price
increase and provide at least a limited explanation. Simply
citing increased costs are the reason for a small percentage
price increase can create greater perceived price fairness than
providing detailed alignable cost increase explanations.
Limitations and future research
The current research examined transparency in pricing in a
price increase context; future research should examine
transparency in pricing effects in general price-setting
contexts (e.g. auto insurance quote determination). The
current research examined two magnitudes of price increase
(i.e. 2 percent increase and 20 percent increase), however, the
overall price increase (25 cents versus $2.50) may still seem
trivial to some consumers. Additional research might consider
effects of price increases on larger purchases. Transparency in
pricing effects may also vary due to changes in pricing
structures such as in the case of consumer backlash against
Netflix’s several dollar price increase on movie rentals
(Netflix.com, 2011). The product context may also play a
role in the findings of the current research. For example,
coffee is a product where many consumers have strong
loyalties toward a particular brand or coffee shop. While we
attempted to control for this by testing effects of coffee
consumption and, in Study 2, by priming the lack of loyalty
towards the mock coffee shop, outside loyalties may have
affected the dependent variable. Additional studies should
examine multiple contexts for generalization and should
consider consumer loyalties in transparency in pricing effects.
Finally, in the disclosure conditions in our research, the firm
was contacted and allowed to provide a reason for the price
increase. Future research should consider price fairness
effects of situations where firms do not get a chance to offer a
reason or comment on a price increase.
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Appendix 1
Study 1. Experimental scenarios
1) Firm disclosure of price increase:
SECTION: Business News
HEADLINE: Betty’s Buzz Coffee Company Announces
Increase in Coffee Prices
BODY: Got three bucks? That and a nickel will buy you a
coffee drink at Betty’s Buzz!
Betty’s Buzz Coffee Company announced it had increased
the price of its lattes, cappuccinos, drip coffee and other
Transparency in pricing and its effect on perceived price fairness
Jodie L. Ferguson and Pam Scholder Ellen
Journal of Product & Brand Management
Volume 22 · Number 5/6 · 2013 · 404 – 412
410
drinks by 5 cents, or an average of 1.9 percent. Betty’s Buzz
also announced it had increased the price of its bagged coffee
by 50 cents per pound, or 3.9 percent. The new prices are in
effect today.
A spokeswoman for Betty’s Buzz explained that the
company increased prices because costs have gone up.
2) External source disclosure of price increase:
SECTION: Business News
HEADLINE: Betty’s Buzz Coffee Company Increases Coffee
Prices
BODY: Got three bucks? That and a nickel will buy you a
coffee drink at Betty’s Buzz!
Without prior announcement, Betty’s Buzz Coffee Company
implemented price increases on its lattes, cappuccinos, drip
coffee and other drinks by 5 cents, or an average of 1.9
percent. Betty’s Buzz also implemented price increases of its
bagged coffee by 50 cents per pound, or 3.9 percent. The new
prices are in effect today.
When contacted, a spokeswoman for Betty’s Buzz
acknowledged the price increases and explained that the
company decided to increase prices because costs have gone up.
Appendix 2
Study 2. Experimental scenarios *
1) No reason for price increase:
SECTION: Business News
HEADLINE: Betty’s Buzz Coffee Company Announces
Increase in Coffee Prices
BODY: Got three bucks? That and a nickel will buy you a
coffee drink at Betty’s Buzz!
Betty’s Buzz Coffee Company announced it had increased the
price of its lattes, cappuccinos, drip coffee and other drinks by
5 [50] cents, or an average of 2 [20] percent. Betty’s Buzz also
announced it had increased the price of its bagged coffee by
25 [$2.50] cents per pound, or 2 [20] percent. The new prices
are in effect today.
2) Limited reason for price increase – same as #1 (no reason),
plus:
A spokeswoman for Betty’s Buzz explained that the company
increased prices because costs have gone up.
3) Detailed and alignable cost reason for price increase – same as
#1 (no reason), plus:
A spokeswoman for Betty’s Buzz explained that the company
increased prices because the costs of coffee ingredients have
gone up. Ingredient costs have gone up because of increased
world-wide demand for coffee and shortages of coffee beans.
4) Detailed and nonalignable cost reason for price increase – same
as #1 (no reason), plus:
A spokeswoman for Betty’s Buzz explained that the company
increased prices because transportation costs for supplies have
gone up. Transportation costs have gone up because of
increased world-wide demand and shortages of fuel.
*Magnitude of price increase is presented in the No Reason
(#1) condition. The bracketed numbers represent the large
price increase condition.
Executive summary and implications for
managers and executives
This summary has been provided to allow managers and executives
a rapid appreciation of the content of this article. Those with a
particular interest in the topic covered may then read the article in
toto to take advantage of the more comprehensive description of the
research undertaken and its results to get the full benefits of the
material present.
Business organizations tend to be somewhat uneasy when
deciding to increase the price of their product. One of the
dilemmas facing them is whether or not to openly announce a
price increase and thus draw attention to this move. A higher
price invites customers to question the value of the product
and launch accusations about the firm behaving unfairly. This
presents a genuine possibility of lost sales and customers, as
the literature points out.
Some firms hope that such announcements might slip
under the radar, although the social media explosion ensures
that this scenario is less likely than before. More probable is
added unwelcome attention on an organization’s pricy policy.
But to refrain from making pricing decisions public is
equally risky. Companies that take this approach when raising
prices can have their integrity questioned. When transparency
is perceived to be lacking, mistrust can easily emerge. Secrecy
is regarded as another dimension of unfairness and customers
might suspect that a business is motivated to act in this way
because it has something to hide. In this situation, distance
between firm and customer widens and faith is shaken. Taking
a proactive approach by disclosing price changes can, on the
other hand, positive impact on perceptions of fairness.
Different researchers advocate transparency in pricing.
Making the public aware of the “economic rationality” or
other “justifiable explanations” behind the decision to
increase is the rationale behind this thinking. Those who
gain some awareness of price-setting policies additionally can
measure company activities against established norms. Acting
transparently also builds goodwill and trust towards the firm,
others note.
Exactly how much information to release is a key issue. On
the one hand, organizations can provide the public with an
itemized breakdown of each component of the price to
include such as taxes and charges. An in-depth disclosure of
the method used to set prices takes transparency to a different
level. Consumers often want to know the causal factors
behind a price change and will use information available to
them to form their opinions. An example is where a seller is
able to explain that a price rise is inevitable because increased
costs have been incurred. The literature cites the description
of a “cost-justified ATM fee” as illustrating this point.
Customer assumption of price fairness is likelier in that
situation as opposed to an increase when any cost-justification
is absent.
The scale of any price increase is of considerable
significance. When a price is raised by a larger amount it
will generally be regarded as more unfair than when the
increase is small. It is therefore believed that perception of
unfairness intensifies as the degree of price rise becomes
greater.
Ferguson and Scholder Ellen also predict that consumer
perceptions of price fairness is likely to be associated with the
amount of information a company divulges. More specifically,
Transparency in pricing and its effect on perceived price fairness
Jodie L. Ferguson and Pam Scholder Ellen
Journal of Product & Brand Management
Volume 22 · Number 5/6 · 2013 · 404 – 412
411
they purport that the detail given should be proportionate to
how much the price has risen. An incremental rise would
seem normal and consumers would possibly anticipate only a
basic explanation from the firm. Brief reference to such as
rising costs or other external circumstances beyond the firm’s
control may suffice. Resource-matching theory posits that an
overload of “cognitive resources” is likely to draw additional
attention to the development and invite unfavorable
speculation as a result. However, additional information is
relevant for larger price increases as consumers may be taken
by surprise and feel a detailed explanation is required. This is
necessary for them to evaluate fairness.
Another factor addressed in the literature is alignment
between the price increase and the reason cited. It is posited
that consumer inclination to consider a rise fair is higher when
the reason given is closely associated with the product. The
reaction could be different in situations where the reason is
not aligned. Although the firm’s activities are transparent,
consumers are likelier to feel the action is unjustifiable. This
reaction might arise in circumstances where an organization
points to a rise in general business costs. When such cost
hikes are not directly connected with the product or service in
question, allegations of unfair practice are possible.
Further investigation of these issues was carried out
courtesy of two experiments. The same fictional coffee shop
was used in both cases. In the first study, participants were
exposed to one of two articles reporting a 5 percent increase
on certain products. One stated that the coffee shop itself
disclosed the rise, while the other declared that it did not. In
the second article, the firm was supposedly contacted by the
article source for comment. Increase in costs was given as the
reason for the price rise in both cases. Female subjects
accounted for 51 percent of the 57 adult respondents from
around the US. Average age of subjects was 33.
The second experiment used the same price increase
scenario and involved adult consumers from various regions
of the US. Of the 195 subjects, 54 percent were male and 35
was the mean age of this sample. Subjects were randomly
assigned to different conditions relating to the extent of
information given and either a 2 percent price increase of
certain coffee products or a 20 percent increase. The four
examination conditions were: no reason given, basic reason
mentioning increased costs and more detailed reasons
incorporating an alignable cost explanation and a non-
alignable cost explanation referring to fuel and transportation.
Indications from these studies suggest that:
.consumers are likelier to deem a price increase as fair
when it is disclosed by the company rather than an
external source;
.perceptions of fairness are more probable when a reason is
given for a price rise than when no explanation is offered;
and
.providing detailed information about a larger price rise
will elicit perceptions of fairness when the increase is
aligned with the product than when it is not.
In respect of the latter, price fairness is also greater in this
condition than when either no explanation or limited
explanation is given.
Other indications prompt the authors to assume that
consumers do not deliberate too much about smaller price
rises. Perception of fairness appears greater if a limited reason
or detailed non-alignable reason is given rather than a detailed
alignable reason. The latter condition might be providing
more information than is desired and can result in doubts
about its truthfulness.
Given the alertness of consumers to price changes,
Ferguson and Scholder Ellen advise business to be
transparent about their pricing policy and to be mindful of
the need to provide the public with a relevant amount of detail
when increases are made. They emphasize that giving
appropriate reasons for any price rise is important if
consumer perceptions are to be favorably influenced.
Future research might explore pricing in other contexts
such as insurance quotes. Price increase on larger purchases is
another avenue to consider, as are different product categories
and the effects of customer loyalty. The authors also
recommend investigating the impact on fairness perceptions
when companies have no opportunity to comment on a price
increase or offer reasons for it.
(A pre
´cis of the article “Transparency in pricing and its effect on
perceived price fairness”. Supplied by Marketing Consultants for
Emerald.)
Transparency in pricing and its effect on perceived price fairness
Jodie L. Ferguson and Pam Scholder Ellen
Journal of Product & Brand Management
Volume 22 · Number 5/6 · 2013 · 404 – 412
412
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