The Conflict of Price Differentiation and Price Fairness

An Analysis of Different Pricing Strategies and Their Impact of Consumers' Perception of Price Fairness

Master's Thesis 2018 105 Pages

Business economics - Business Management, Corporate Governance


Table of Content

List of Figures

List of Tables

List of Abbreviations

1. Introduction
1.1 Significance of the Study and Problem Statement
1.2 Research Objective and Research Questions
1.3 Research Methodology and Structure

2. Price Determination in Economic Theory
2.1 Law of Supply and Demand
2.2 The Role of Pricing in the Marketing Mix

3. Modern Pricing Policy - Price Differentiation Strategies
3.1 Degrees of Price Differentiation
3.2 Price Differentiation as a Marketing Instrument
3.2.1 The Nature of Dynamic Pricing
3.2.2 The Nature of Gender-Based Pricing
3.3 Ethical and Moral Limitations

4. The Perception of Price (Un-)Fairness
4.1 The Drivers of Perceived Price (Un-)Fairness
4.2 Dual Entitlement Theory
4.3 Attribution Theory
4.4 Equity Theory

5. Examination of Practical Price Differentiation Strategies
5.1 Example A: Surge Pricing at Uber
5.2 Example B: Gender-Pricing in the Haircutting Industry
5.3 Example C: Dynamic Pricing in Case of Product Scarcity

6. Online Survey: The Limitations on Price Differentiation
6.1 Methodological Approach
6.2 Population and Sample
6.3 Survey Design
6.4 Descriptive Analysis
6.5 In-depth Analysis of Collected Data
6.5.1 Cluster Analysis
6.6 Discussion and Implications
6.7 Limitations and Outlook

7. Conclusion

8. Reference List

9. Appendix

Annex A

Annex B

Annex C

List of Figures

Figure 1 Law of Supply and Demand - Equilibrium Price

Figure 2 The Marketing Mix

Figure 3 Types of Price Differentiation

Figure 4 Gender Distribution

Figure 5 Level of Education

Figure 6 Current Occupation

Figure 7 Monthly Net Household Income

Figure 8 Tree Diagram Approach

Figure 9 Price Perception Disco/Bar Entrance

Figure 10 Price Perception Haircutting Industry

Figure 11 Price Perception Snow Shovel - Snow Storm

Figure 12 Price Perception Snow Shovel - Production Costs

Figure 13 Price Perception Technical Devices

Figure 14 Price Perception Rideshare Services 1 - Residential Area

Figure 15 Price Perception Rideshare Services 2 - Weather Conditions

Figure 16 Price Perception Rideshare Services 2 - Battery Status

List of Tables

Table 1 Descriptive Statistics and Relative Frequencies

Table 2 Cluster Evaluation Disco/Bar Scenario Men

Table 3 Interpretation of Cluster and their Perceived Price (Un-)Fairness

Table 4 Cluster Evaluation of Haircutting Services for Women

Table 5 Interpretation of Cluster and their Perceived Price (Un-)Fairness

Table 6 Cluster Evaluation: All Participants in all Scenarios

Table 7 Interpretation of Cluster and their Perceived Price (Un-)Fairness

Table 8 Perception of Price (Un)Fairness According to Strategy

Table 9 Variance for Cluster Analysis

Table 10 Correlation Coefficient for Cluster

Table 11 Variance for Cluster Analysis

Table 12 Correlation Coefficient for Cluster

Table 13 Variance for Cluster Analysis

Table 14 Correlation Coefficient for Cluster

List of Abbreviations

Abbildung in dieer Leseprobe nicht enthalten

1. Introduction

1.1 Significance of the Study and Problem Statement

Within the last decades, the importance of pricing strategies significantly increased for companies. In order to ensure profitability, businesses need to carefully consider which prices to charge for specific products and services (Lipovetsky, Magnan & Polzi, 2011, p. 167). In addition, digitalization leads to the fact that markets get increasingly tensed, and furthermore enable firms to adapt modern pricing policies (Serban, 2017, p. 183). Thus, the adaptation of prices according to consumer behavior might have huge impacts on the overall financial position of these particular companies (Esteves & Cerqueira, 2017, p. 62). Due to the increasing importance of consumer profile analysis, the implementation of price differentiation strategies becomes increasingly relevant for numerous business enterprises. Nevertheless, the issue of charging different prices from segmented customers for the same product or service might result in doubts of perceived price fairness (Ratchford, 2013, p. 344).

As a consequence, companies face a paradox - How to balance differential prices and customer satisfaction in terms of price fairness. In order to ensure customer loyalty, companies must be perceived as fair providers of certain products or services (Skiera, 1999, p. 287). Thus, firms need to carefully consider customers' willingness to pay while taking advantage of differential prices, but still avoid the feeling of exploitation (Bolton, Warlop & Alba, 2003, p. 475). In case of perceived price unfairness, firms potentially have to take long-term negative effects from the customer dissatisfaction into account (Miller, 2014, p. 85).

In the context of price fairness, the limitations of differential prices are not clearly set nowadays. Especially regarding different business sectors, these particular limitations might vary. Due to the fact that some business sectors, as the haircutting industry, implement differential prices since the early days of practicing, consumers potentially are used to the pricing policy (ADS, 2017, p. 26). In contrast, new arising products and services with differential price adjustments might face higher resistance from consumers (Cachon, Daniels & Lobel, 2015, p. 1). Therefore, the analysis of price fairness among different business sectors in the context of differential prices represents high relevance. From a company’s perspective, the examination of exact limitations of different price adjustments that consumers are willing to accept or reject from enables companies to take diverse advantages - as the data mining of consumer data reveals a significant effect on profit generation (Bauer & Jannach, 2018, p. 1, Lippold, 2017, p. 330). In this context, the work aims to identify homogenous customer groups according to similar sociodemographic characteristics in to extend the limitations of price differentiation in terms of price fairness. Finally, the work focusses on two important variables, that impact perceived price (un)fairness in price differentiation strategies: Firstly, the differentiation between several implementations in different business sectors and secondly, the varying levels of perceived price (un)fairness according to indicated customer groups.

1.2 Research Objective and Research Questions

The previous paragraphs already outlined the importance of the identification of limitations on price differentiation strategies in terms of price fairness within both associated variables that influence these limitations. In the end of this work, the findings are transferred into recommendations for involved firms of price differentiation strategies.

In order to summarize the findings of the thesis at the end of the investigation, the work is based on three self-designed research questions (RQ).

RQ1: How is price differentiation perceived as fair by consumers with respect to demographics?

As already introduced in the previous sub-chapter, the work is inspired by the assumption that segmented socio-demographic groups differ in their perception of perceived price (un)fairness. More precisely, the assumption follows the assumption that for instance, women potentially perceive differential prices differently fair as men. However, it is necessary to test this assumption, which brings this research field to the creation of a specific research question for this work.

RQ2: How do certain demographical groups differ in their price fairness perception?

It is moreover assumed that individuals can be segmented into diverse sub-groups more specifically. The master thesis incorporates a test which classifies homogeneity among demographical groups to represent specified limitations of price differentiation. Exemplarily, it could be assumed that women of diverse age categories and a varying net household income differ in their perception of price fairness as well.

RQ3: Do different business sectors show diverse levels of dissatisfaction regarding perceived price fairness?

Moreover, the work focusses on another determinant of perceived price (un)fairness regarding price differentiation. Therefore, the research not exclusively focusses on how homogenous groups react to price differentiation strategies, but also how the perception of the centered topic differs in diverse business sectors. Speaking of different business sectors, the differentiation between different products and services within different industries is defined. The conclusion that will be present at the end of the work, is therefore extended by the following price differentiation cases: Haircutting industry, rideshare services, product scarcity, e-commerce and entrance fees for clubs. The selected practices present a diversity of implementations, which however all have been a topic of discussion in the ethical context and serve for a direct comparison for the findings.

Hereby, the different limitations of price differentiation implementations will be classified as well.

1.3 Research Methodology and Structure

Generally, the thesis can be clustered into four main parts which are chronologically structured in order to serve a consistency in the level of comprehension: The first pillar of the thesis begins with the theoretical foundation of price differentiation strategies. For that, an introduction into the derivation of a price is explained within the law of supply and demand. Accordingly, the instrument of a price is presented in the context of marketing, which enables an introduction into the definition and types of price differentiation strategies. Herewith, the evolution of price adjustments is demonstrated appropriately. For the first part of the thesis, mainly scientific literature in form of books is used.

Accordingly, the second building block of the thesis conducts the theoretical foundation of the notion of price (un)fairness. For the examination of the term and the determination of drivers of perceived price (un)fairness, mostly academic journals are used and analyzed. Moreover, the existing research nowadays regarding this topic belongs to the research field of behavioral economics, which correlates the field of economics and psychology. Herewith, the two variables that define the conflict that is investigated in this paper, are brought together.

After the evaluation of existing literature, which examines the role of a price as well as the determination of the drivers of perceived price fairness, the necessary theoretical basis for the following chapter is ensured - The work continues with the elaboration of diverse practical examples of price differentiation. According to different business sectors and forms of implementation, the diversity of these strategies is confirmed. Moreover, the notion of perceived price (un)fairness is presented in a tangible manner and therefore is presented comprehensively. The literature for the third building block of the thesis being used differs - as the historical implementation of gender pricing in haircutting services is demonstrated in numerous case studies and academic journals, whereas the surge price implementation of the ride share company Uber is scarily represented in academic literature. As a consequence, newspaper articles are mainly used for the demonstration of the practices of the digital native vertical brand.

Coming to the last main part of the thesis, namely the empirical research part, a quantitative research approach is conducted and presented in a structured order (Bryman, 2016, p. 163). The selected research method for this paper is known as a deductive approach. As this approach requires an integration of both existing theory and a self- created empirical research strategy, the work considers a quantitative research strategy to collect numerous answers of a sample representing the population. Finally, new limitations of price differentiation in terms of price fairness can be determined (Bryman, 2016, p. 161). In order to ensure consistency, the questionnaire is provided with scenarios that are linked to the practical examples being outlined in the third building block of this paper. All participants are asked to rate the price fairness of these instances on a five- point Likert-scale. With the evaluation of the questionnaire, the thesis is supplemented with a representative research method to answer the stated research questions appropriately. According to Bryman (2016, p. 163), the results of a questionnaire are in need of interpretation. Thus, the findings need to be brought into correlation with pre- findings from secondary data. Afterwards, the interpreted findings are used to either confirm or reject the following hypothesis. Finally, implications and a future outlook of the thesis are followed by final conclusion.

Hypothesis Creation

In order to fully capture the requirements of the chosen deductive research approach, the thesis presents several hypotheses (H) that summarize the assumptions that have been created beforehand, and consequently can be seen as the inspiration of the work. Within additional primary data that is collected, a final conclusion will be drawn at the last stage of this thesis.

H1: With respect to sociodemographic-differentiated groups, the perception of price fairness shows diverse notions.

The first hypothesis is linked to RQ1. To start with a quite general hypothesis to be tested, H1 focuses on the assumption of differing perceptions of price fairness according to socio-demographic characteristics of individuals.

H2: With respect to different business sectors, practices of price differentiation are perceived as similarly (un)fair.

Moreover, H2 focusses on RQ3. In spite the fact that price differentiation is widely spread and shows diverse types of implementations, it is assumed that the overall perception of price differentiation is perceived similarly unfair.

H3: Differing reasons for price increases result in differing perceptions of price (un)fairness.

Existing research nowadays is greatly inspired by the theory, that consumers tend to accept higher prices if they have transparent access that causes such price increases. In contrast, price increases that seem to be unreasonable, are perceived as increasingly unfair (Kahneman, Knetsch & Thaler, 1986, p. 730).

H4: The longer the practice of price differentiation strategy shows existence, the greater the acceptance for the particular price.

Coming to the complexity that strives the research field of perceived price unfairness in price differentiation implementations, consumers react differently to the modern pricing strategies - the hypothesis assumes that differential prices for products and services that are habitual, are more likely accepted than new emerging implementations of differential prices.

2. Price Determination in Economic Theory

„Pricing is one of the most important decisions that impact a firm’s profitability.” (Sen, 2013, p. 586).

According to Kotler & Armstrong (2012, p. 290), the price is defined as „The amount of money charged for a product or service, or the sum of all the values that customers give up gaining the benefits of having or using a product or service.”

A company is committed to determine the optimal price according to the company’s vision and mission. Furthermore, it needs to be adapted that consequently, the firm successfully obtains an ambitious position against competitors in a certain market. Besides that, prices for served products and services should support a firm’s overall financial position (Simon, 1995, p. 5). Moreover, a price is essential for a customer’s decision-making process (and therefore essential for a company’s success) - the consumer can either accept or deny the price for the provided good of a seller (Simon, 1995, p. 5). As in an imperfect competition numerous provider of identical goods are competing against each other in a certain market, the consumer can make use of a direct comparison of the existing prices for the same product and decide, which of the prices meets the personal willingness to pay (Parkin, 2015, p. 104).

2.1 Law of Supply and Demand

The following subchapter deals with the macroeconomic theory of law of supply and demand. One purpose of this explanation is to shortly outline the nature and evolution of a price in a market, and secondly, to give the reader the basis of understanding the price as a whole.

In economic theory, the two elements, supply and demand of economics, derive a price. The framework is used since the early stages of economic theory to understand and illustrate the evolution of a price in dependency both factors (Gale, 1955, p. 155). Demand is defined as the amount or quantity of a product or service consumers are willing and able to purchase them at different price levels. In contrast, supply is defined as the quantity of how many products or services are offered at each price (Whelan &, 2001, p. 10).

The interaction of both factors in the market is necessary for an exchange of buyers (consumers) and sellers (vendors), as the intersection of both parties represent the “equilibrium price” (Gale, 1955, p. 155). At this section, both parties agree on a price that is adjusted for a certain product or service. It is „ […] the one price which equals quantity demanded and exceeds the quantity supplied.” (Parkin, 2015, p. 104)

If a price is set above the equilibrium, vendors offer a greater quantity of goods and services than consumers are willing to purchase. Consequently, a surplus of goods emerges, and the price is pressured downwards. Already Adam Smith outlined in 1776 (p. 61), in case that supply exceeds demand, some component parts of that particular price are consequently paid below their natural rate. In contrast, if supply exerts a shortage proportionally to the demand of consumers, the price is pressured upwards (Samuelson & Nordhaus, 2010, p. 60). Finally, a shift in supply and demand results in a change in the equilibrium price and quantity (Parkin, 2015, p. 99).

However, the stated theory claims that there exists the equilibrium of only one single product market. In actual economy, complexity arises within the structures of a competitive market containing many buyers and sellers (Parkin, 2015, p. 108). The theory is outlined in this paper to give an introduction and first insights of the role of pricing in economic theory. Due to limited number of words and the main focus of this work, the theory will not be outlined any further.

Finally, the original intersection of demand and supply can be illustrated as in the following, where point a demonstrates the equilibrium price:

Figure 1: Law of Supply and Demand - Equilibrium Price

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Source: Own illustration based on O’Sullivan, Sheffrin & Perez, 2013, p. 77

2.2 The Role of Pricing in the Marketing Mix

As the previous chapter examined how a price is derived, the following sub-chapter outlines the role of a price from a business perspective in correlation with further instruments being highly prioritized in decision-making processes of firms.

Originally, the price is one of the four marketing mix instruments, further including the tools Place, Promotion and Product (Kotler & Armstrong, 2012, p. 63). The Marketing Mix, often also referred as the „4Ps”, represents a marketing model firstly used in the mid-nineties by McCathy, with an original use from the macroeconomic perspective.

Today, the model is used as a tool to transfer marketing planning into practice and furthermore, to conduct each marketing element’s influence on marketing outcomes (Kotler & Armstrong, 2012, p. 116).

According to Kotler, Wong, Saunders & Armstrong (2005, p. 34) „The marketing mix consists of everything the firm can do to influence the demand for its product.” The marketing mix is not present as a scientific theory but shows a high relevance as a conceptual framework for marketers. The model extended within additional three tools, called the 7P’s. The extended tools are People, Processes and Physical Evidence (Rafiq & Ahmed, 1995, p. 4). However, in this paper the original model of the 4P’s is examined to illustrate the role of the price in economy.

In practice, the model is usually compared to a recipe for the preparation of a meal or dish. Similar as dishes, every product is in need of a different portion of „ingredients”. Companies use the marketing mix as a simple tool to allocate the needed resources among the different demands, and in case of a product launch, according to the various competitive devices of the 4P’s. As the allocation of resources always represents a tradeoff for marketing managers, they benefit from the feasibility of the marketing mix model and prioritize resources easily (Choi, 2009, p. 2).

According to Choi (2009, p. 2), the instrument of the price should never be regarded as an isolated singularity, but always with respect and correlation with the other instruments, as the price only reflects the performance of the product, communication and distribution (Choi, 2009, p. 2). Nevertheless, the price is a very powerful tool of business actors in economy (van den Bulte & van Waterschoot, 1992, p. 84). The price represents an elementary criterion for consumers’ decision-making process for the vendors’ goods. Moreover, it is the only instrument of the framework that allows direct revenues as an outcome (Kotler & Armstrong, 2012, p. 290). To conclude, the price has a huge impact on the profitability of a firm and their financial stability (Pechtl, 2005, p. 8), but still is dependent on diverse factors that lead to price adjustments and resulting revenues (Sen, 2013, p. 586).

Figure 2: The Marketing Mix

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Source: Own illustration based on Kotler & Armstrong, 2012, p. 63

3. Modern Pricing Policy - Price Differentiation Strategies

As already mentioned beforehand in this work, a price is originally determined by supply and demand. Moreover, there exist diverse strategies for marketers to adjust a price for a specific product or service. The firm enterprises can either focus on cost-oriented price determination, competition-oriented price determination or, as already explained, on demand-driven factors (Meffert, Burmann & Kirchgeorg, 2014, pp. 482-491). However, economists and marketers discovered that the determination of a price can be extended to further factors than those cited. Speaking of other factors, consumers’ preferences and their willingness to pay increasingly influence pricing polices nowadays. Pricing strategies expanded widely, and numerous companies take advantage of individual price preferences of consumers whilst selling the same products and services (Cosguner, Chan & Seetharaman, 2017, p. 426).

The mentioned modern characteristics of pricing strategies bring us to the centered topic of this master thesis, namely price differentiation strategies (Miller, 2014, p. 44).

The theory of price differentiation first came into economic-related existence by Pigou in 1920 (Ekelund, 1970, p. 270). Within centuries, the overall definition and usage of this pricing term stretched widely. As a general term, price differentiation is understood as “the act of selling the same article, produced under a single control, at different prices to different buyers.” (Robinson, 1969, p. 179)

According to this definition and focus, the mentioned pricing strategy firstly was considered in an economic interest, as numerous market players noticed the opportunity to charge prices based on the product’s value for consumers - and less on rising production costs, as originally in economic strategies (Milgrom, 1989, p. 365).

Nowadays, price differentiation strategies are implemented within marketing approaches as well (Prasad, Venkatesh & Mahajan, 2015, p. 2). Within this evolution, providers of goods and services take advantage of differentiated prices that include strategic price positioning tools as coupons, bundled packages, dynamic pricing to improve the company’s overall financial position (Prasad, Venkatesh & Mahajan, 2015, p. 2).

According to Yeoman (2006, p. 322), the benefit of differentiated prices lies in the following: “A strong and effective pricing strategy takes advantage of a company’s position and product offerings to maximize profit. A differential pricing strategy allows the company to adjust pricing based on various situations and circumstances.” In other words, the modern pricing strategies allow firms to adjust prices based on individuals’ willingness to pay for a good or service (Cosguner, Chan & Seetharaman, 2017, p. 426). Companies taking this profit-maximizing opportunity, analyze the so- called elasticity of demand of their consumers. Elasticity of demand describes the factor of change in the willingness to pay for a product of consumers in response to changes in price. As a consequence, the collected data allow the firm to flexibly change a price according to the consumer’s profile (Yeoman, 2006, p. 323).

According to Meffert, Burmann & Kirchgeorg (2014, pp. 468, own translation), the ultimate goal of price differentiation strategies presents “[…] profit increase due to absorption of the consumer surplus.” Basically, the consumer surplus represents the willingness to pay of individuals for a certain product or service, with the discrepancy of the price that is actually paid, due to currently lower prices ruling the market. Therefore, the ultimate goal of differentiated prices lies in fully exhausting the consumer surplus, by charging the absolute maximum price that would be paid by every individual (Miller, 2014, p. 57).

3.1 Degrees of Price Differentiation

Basically, price differentiation is clustered into three main degrees by Pigou (1932, p. 279), which are explained shortly in the following part of this paper.

(1) First-degree differentiation for individual customers

According to Pigou, (1932, p. 279), the first degree of price differentiation, or also known as „perfect price discrimination”, „would involve the charge of a different price against all the different units of commodity, in such wise that the price exacted for each was equal to the demand price for it, and no consumers’ surplus was left to the buyers”. Accordingly, the first degree aims to exhaust the total consumer surplus of one, by charging the highest possible price for a product or service for every individual. Necessarily, the vendor analyzes the willingness to pay for the good beforehand, to successfully charge the highest price which is, however, still accepted by the consumer. Practically, this degree could exemplary occur on a bazar, where the vendor charges different prices according to the willingness to pay being analyzed while selling the product or service to a certain consumer (Miller, 2014, p. 55).

(2) Second-degree differentiation in self-selection

The second degree of price differentiation occurs while inducing „self-selection” of customers in respect to the same demand level and price sensitivity. Consequently, the vendor determines one identical price per consumer group, which finally serves the consumer surplus of numerous individuals simultaneously. However, the addressed consumers are free in their decision-making process, and furthermore are segmenting themselves by purchasing goods that directly outline their classification as particular consumer groups. For instance, a buyer acts in „self-selection”, while deciding for either a first-class ticket or a second- class ticket for a train ride (Pigou, 1932, p. 279, Simon, 1995, p. 107). According to anti-discrimination body of Germany (2017, p. 20), the second degree of price differentiation occurs in dependency on quantitative factors (e.g quantity discount), qualitative factors (e.g product varieties) or is either dependent on time (e.g demand).

(3) Third-degree differentiation for segmented customer groups

In contrast, third-degree of price differentiation strategies „would obtain if the monopolist were able to distinguish among his customer in different groups, separated from one another more or less by some practicable mark, and could charge a separate monopoly price to the members of each group […].” (Pigou, 1932, p. 279)

Referring to the second degree of price differentiation, similar strategic elements potentially are noticed, as both degrees deal with an observation of specific customer groups. However, the third degree pays attention to identifiable sociodemographic factors as age, gender, geographic location and several others. Consequently, the differentiation in the segmented group examines consumers’ personal data and therefore allows practices as gender-pricing, student discounts (Simon, 1995, p. 109). According to research report from the anti-discrimination body of Germany (2017, p. 20), the third degree can occur due to personal and sociodemographic factors (e.g gender, age) or spatial factors (e.g location or region).

3.2 Price Differentiation as a Marketing Instrument

In general, it can be stated that firms use price differentiation strategies as a competitive marketing instrument. Thus, business enterprises implement modern pricing strategies into their business model to outperform competitors in a certain market, while ensuring an ambitious position with strategic pricing (Elegido, 2011, p. 633). From a business perspective, such pricing strategies are considered to attract a customer’s interest in a market for certain products and services. As in an imperfect competition numerous seller are operating in the same market, a consumer is confronted with numerous possibilities to buy a specific product or service; a successful and financially stable company will attempt to be the first supplier in a customer’s mind. (Robinson, 1969, p. 8). For instance, by the implementation of several price differentiation strategies that are outlined in the following chapter. For a successful implementation, those strategies have to be used in well through thought situations and necessarily need to be adapted to the companies’ market position and financial position (Wolk & Eblings, 2010, p. 146).

In general, there exist numerous types of price differentiation strategies. Despite the degrees, that have been defined in the previous part of this thesis, firms can adjust their differential prices with focus on time, region, quantity, quality, or sociodemographic factors (Diller, 2008, p. 28). The following illustration summarizes diverse possibilities to implement the strategies into practices. Due to limited number of words, the different approaches will not be explained any further. However, the work focuses on two specific types of practical price differentiation implementations, being outlined in the following two sub-chapters.

Figure 3: Types of Price Differentiation:

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Source: Own illustration based on Diller & Herrmann, 2013, p. 497

3.2.1 The Nature of Dynamic Pricing

Regarding history, prices have been adjusted on to negotiations between the buyer and the seller. The usual pricing policy being used for a transaction between both parties is known as the “fixed price” policy - which focuses on one equal price for all consumers, with no differentiation taking place (Sen, 2013, p. 586). Even though it still shows presence as a common price policy nowadays, the traditional pricing strategies face reverse in especially the web-selling segment (Elegido, 2011, p. 633). Companies refuse from fixed prices, and instead are increasingly considering “dynamic pricing”, which can be defined as: “Adjusting prices continually to meet the characteristics and needs of individual customers and situations.” (Kotler & Armstrong, 2012, p. 346). According to Miller (2014, p. 47), dynamic pricing „ […] is sometimes conflated with price discrimination, denotes any frequent adjustments and fluctuations of posted prices.”

Thus, this particular price differentiation strategy is commonly known as “fluid pricing”, as it represents a flexible price policy, continuously adjusting new prices based on given demand dynamics (Yang, Zhang & Zhang, 2017, p. 908). Usually, fluid pricing involves changes in prices that sellers are adjusting on a regular basis. However, the regularity for price changes increased - in the past, vendors adjusted their prices every week to every month. In contrast, today especially web sellers take advantage of databases and adjust the prices every few hours. For that, supportive tools as price-comparison bots of competitor prices are used to fasten the process with automatically working software (Miller, 2014, p. 47).

Another supportive tool of dynamic pricing in e-commerce is a so-called cookie, which are small virtual pieces of a code enabling firms to analyze the price sensitivity of consumers. Cookies are partly present as “Ads” in the World Wide Web and directly lead consumers to personalized offers. Thus, sellers are able to customize prices, if a consumer is following a positioned Ad to an associated offer (Kephart, Hanson & Greenwald, 2000, p. 743). Finally, the firm receives information about the consumer, regardless of whether the targeted person finally considers the personalized offer or not (Brauer & Jannach, 2018, p. 5).

Overall, dynamic pricing enables companies to mine their databases and furthermore identify specific customer profiles to underline products that fit to the customer’s purchasing behavior (Miller, 2014, p. 45).

The pricing strategy can be monitored in diverse forms. In practice, web-sellers do not only analyze consumer data based on cookies or positioned Ads. The willingness to pay for products and services can also be analyzed due to the technical equipment consumers use online shopping. As in the case of online retailer www.orbitz.com, consumers being in possession of an Apple device faced higher prices for an identical travel service in comparison to owners of Windows devices (Mattila & Choongbeom, 2014, p. 210).



ISBN (eBook)
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Cologne Business School Köln
Pricing Price Differentiation Price Discrimination Price Fairness Gender Pricing Surge Pricing Price Strategies



Title: The Conflict of Price Differentiation and Price Fairness