A department store is offering discounts on jeans of all sizes except yours. When you inquire, the customer service executive tells you that your size is in great demand and, hence, the store offers no discount. How will you react to the price discrimination, assuming that you are not compelled to buy jeans for your wardrobe? If you are typical consumer, you would most likely storm out of the store without purchasing any product. And what's more, you might also actively discourage your friends from shopping there. We tend to perceive price discrimination, especially those beyond our control, as unfair. This is, perhaps, why we accept price differentiation in air tickets; you can buy tickets at a cheaper rate if you book early.

But how would you react to the store's pricing policy if you are truly in need of jeans? In turns out that you may still walk out the store without buying. You would rather buy the name-brand jeans in another store at the same price. You may even buy same jeans in another store at a higher price if all other sizes are also priced higher!

Fairness effect

Research conducted in this area shows that people get angry not so much by price increase as by price discrimination. That is, we may accept a uniform price increase on all sizes. We do not, however, like it when a store charges higher price for, say, large-sized clothing.

Psychologists call this the “Fairness Effect”. This is important for all businesses because the perception of unfair practice could result in lost revenue.

Suppose you run a neighbourhood convenience store. There has been a transport strike and the city is fast running out of bread and milk. Will you seize the opportunity and increase the price of bread and milk? If you do, consumers may deem the price increase unfair and you may permanently lose customers. If you do not increase price, demand will far outstrip supply. In all fairness, what would you do?

(The author is the founder of Navera Consulting. He can be reached at >enhancek@gmail.com )

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