Sirui Li

This paper studies how consumers’ concerns about fairness interact with third-degree price discrimination of a two-sided monopoly platform. We show that the presence of fairness concerns creates a negative demand externality from low-willingness-to-pay to high-willingness-to-pay consumers, that is, charging less to the former reduces the latter’s demand. With this novel externality, price-discriminating among consumers triggers fairness concerns, which lowers consumer-side demand and ultimately restricts the platform’s profit exploitation from the seller side. Hence, a platform whose profit potential from sellers is larger would take consumers’ fairness concerns more seriously and price-discriminate less. The results can explain why some major online platforms—despite the huge profit potential of targeting prices—shy away from price discrimination in response to consumers’ fairness concerns, while others care little about unfairness complaints when price-discriminating among consumers.

Making homogeneous goods seem different is a key to preventing consumers from observing too many disadvantageous price differences and to mitigating the induced aversion to price inequality. Since this type of obfuscation has attracted regulatory attention and become costly, a new question arises: can price inequality aversion be manipulated if there is no barrier to observing a price difference for the same good? To answer this question and explore underlying consumer behavioral biases, we conducted two series of laboratory experiments with a total of 415 subjects in China. We examined the effect of explaining different prices as a result of different discounts in Study I. The results indicate that the price framing trick makes little difference to consumers’ perception of price inequality, but it can increase the tolerance of perceived price inequality when the price difference is neither large nor small enough for a binary saliency judgment. Our Study II investigated the effect of changing the shares of observed price offers. The results signify a minority effect: if consumers perceive themselves as a kind of disadvantaged minority, their price inequality aversion holds strong and changes little as they see a larger share of price offers no better than theirs; otherwise, their price inequality aversion decreases significantly in the share of disadvantaged price offers. With practical cases, we further discuss how retailers can exploit by delicately displaying prices for the same good to consumers.