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| Author: | Rotemberg, J.J. |
| Title: | Fair pricing |
| Journal: | Journal of the European Economic Association
2011 : OCT, VOL 9:5, p. 952-982 |
| Index terms: | price discrimination consumers elasticity of demand pricing |
| Language: | eng |
| Abstract: | This paper explores the consequences of supposing that consumers see a firm as fair if they cannot reject the hypothesis that the firm is somewhat benevolent towards them. If consumers can reject this hypothesis, some get angry, which is harmful to the firm. In order to appear benevolent, firms may adopt third-degree price discrimination based on the income of different consumer classes while foreswearing the discrimination based on differences in the elasticity of demand. It can also explain why prices seem to be more responsive to changes in factor costs than to changes in demand that affect marginal cost similarly. Lastly, if consumers become regretful or disappointed when faced by increased prices, the model can explain why prices can be more rigid in response to disasters increasing demand dramatically than they are when there is a less substantial increase in demand. |
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