Prices are fairer than you think—no, really

Sticker shockthats 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 youre 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 colleaguesLuk Warlop of Katholieke Universiteit Leuven in Belgium and Joseph Alba of the University of Floridadiscovered that consumers frequently overestimate profits by failing to take into account a companys 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: Youre out shopping for a shirt and its a Liz Claiborne; you see it in J.C. Penney. Then youre out the next week at Ross and youre seeing the very same shirt and its half the price. Instead of attributing the price difference to a firms 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. Theyre doing it for department stores, discount stores, grocery stores. For grocery stores, its really 1 or 2 percent so people are really overestimating.

Bolton said these perceptions arent likely to improve if business headlines are any gauge.

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

So how can firms convince consumers theyre getting a fair deal? One possibility, said Bolton, could be educating consumers about the firms 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 wont 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 firms cost. Drawing a blank? Youre not the only one. Bolton said the mind of a consumer doesnt 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.