Prices are fairer than you think—no, really

Bolton

Photo by Candace diCarlo

Sticker shock—that’s the feeling you get when you go to make a purchase, flip over the tag and are blown away by the higher-than-expected asking price. For example, when you go to the movies for the first time in a long while and are shocked to find that an Alexander Hamilton covers only the price of one ticket (forget about the popcorn and soda).

If you’re like most consumers, you suspect price gouging. Yet according to Lisa Bolton, assistant professor of marketing at Wharton, prices may be fairer than many of us think.

In “Consumer Perceptions of Price (Un)Fairness,” a study that will appear in the March issue of the Journal of Consumer Research, Bolton and her colleagues—Luk Warlop of Katholieke Universiteit Leuven in Belgium and Joseph Alba of the University of Florida—discovered that consumers frequently overestimate profits by failing to take into account a company’s costs and the effects of inflation. The researchers further found that when judging the fairness of prices consumers rely on reference points, one example being knowledge of past prices (as in the case with movie tickets).

Another reference point is knowing what competitors are charging. Bolton painted this scenario: “You’re out shopping for a shirt and it’s a Liz Claiborne; you see it in J.C. Penney. Then you’re out the next week at Ross and you’re seeing the very same shirt and it’s half the price.” Instead of attributing the price difference to a firm’s cost structure, such as the cost of better service and higher rent at the department store vs. the discount store, consumers routinely blame unfair profit margins.

This consumer tendency exists no matter the type of store, said Bolton. “When asked what percentage out of a dollar is profit, people estimate 30 percent. They’re doing it for department stores, discount stores, grocery stores. For grocery stores, it’s really 1 or 2 percent so people are really overestimating.”

Bolton said these perceptions aren’t likely to improve if business headlines are any gauge.

“No wonder people think prices are unfair, especially when they’re being reminded that big fat-cat CEO is getting all this money.”

So how can firms convince consumers they’re getting a fair deal? One possibility, said Bolton, could be educating consumers about the firm’s cost structure. When individuals are cued to think about costs, like rent and labor, perceptions of fairness rise. But not all costs, such as promotions, are considered equally fair. Bolton said Nike won’t win any points asking consumers to take into account the large salary it pays its celebrity promoters.

Bolton said profit perceptions in general are difficult to change. Think about the last time you went shopping and independently factored in a firm’s cost. Drawing a blank? You’re not the only one. Bolton said the mind of a consumer doesn’t always mesh with how managers think.

“Here we live in this society that has embraced the competitive marketplace,” she said. “But we as consumers have some pretty interesting ideas on how we think the competitive marketplace works and should work and that may not [overlap with] what managers think.”

Originally published on November 14, 2002