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Research Note—Does Demand Fall When Customers Perceive That Prices Are Unfair? The Case of Premium Pricing for Large Sizes

Kellogg School of Management, Northwestern University, Evanston, Illinois 60208
Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142
eric-anderson{at}kellogg.northwestern.edu
simester{at}mit.edu

We analyze a large-scale field test conducted with a mail-order catalog firm to investigate how customers react to premium prices for larger sizes of women's apparel. We find that customers who demand large sizes react unfavorably to paying a higher price than customers for small sizes. Further investigation suggests that these consumers perceive that the price premium is unfair. Overall, premium pricing led to a 6% to 8% decrease in gross profits.

Key Words: product line pricing; price discrimination; fairness; price promotion; experimental economics
History: Received: January 25, 2005;