Transparent pricing: theory, tests, and implications for marketing practice

Abstract

In today’s retail markets, products display opaque pricing, i.e., a single number that provides no information about the allocation of the retail proceeds among agents who bring the product to market. We study transparent pricing, which is an alternative strategy in which allocation information is revealed. We differentiate transparent pricing from related marketing practices such as social marketing, cause-related marketing, and pay-what-you-want. Using controlled experiments in multiple product categories with diverse sampling frames, we find that transparent prices systematically alter consumer utility functions and stated choice behavior. Our results support explanations drawn from both neoclassical and behavioral economic theory, including inequity aversion, procedural justice, and altruism. Classical theory predicts that price transparency should have little effect on consumer behavior. However, results from behavioral economics suggest that consumers may relax “self-interest” in the face of transparent prices, leading to counter-intuitive preferences. For example, in one set of studies we observe a significant proportion of consumers selecting the more expensive of two replicates of the same product. In another study, a subset of motorists willingly pays higher gasoline taxes for the same gallon of gas, increasing the overall price per gallon. We explain this behavior via parameterized utility functions that contain both self-interested and other-interested components moderated by characteristics of the decision-maker and characteristics of the choice context.

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Notes

  1. 1.

    Exceptions include backward sloping demand curves when consumers impute quality from price. However, as will be evident, this phenomenon does not apply in the cases studied here.

  2. 2.

    A longer version of the paper containing results for standard economic hypotheses is available on request.

  3. 3.

    We assessed the reasonableness of this assumption in a companion research project. Results hold independently of which agent is selected as the focal agent.

  4. 4.

    We experimentally manipulate the share of price going to the focal agent so that A*(⋅) designates a specific fixed allocation to A* in a given experimental condition. For example, in experiments involving music CDs, the low level going to A* (the artist) is 8%. The notation indicates that one can replace the variable argument (⋅) with a constant (Lo); i.e., A*(Lo)≡8% and that this level is determined exogenously across subjects.

  5. 5.

    These arguments are presented in a note available from the authors.

  6. 6.

    Not unexpectedly, students believe higher shares should go to taxes than do adults. The student’s cumulative distribution lies significantly to the right of that for adults.

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Acknowledgement

Professor Curry thanks John Dinsmore, Grace Guo, Xiaoqi Han, Helene Deval, Doug Ewing, and Scott Wright – students in his PhD Seminar on Discrete-Choice Modeling – for insights drawn from hierarchical Bayesian analyses about the gasoline data from the Adult sample. This research was partially funded by a grant from the College of Business, University of Louisville.

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Correspondence to Robert E. Carter.

Appendices

Appendix A

Table 5 Example choice set for music CDs

Appendix B

Table 6 Allocations to each of the supply side agents by category

Appendix C

Table 7 Perceptions of “should” allocations to agents

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Carter, R.E., Curry, D.J. Transparent pricing: theory, tests, and implications for marketing practice. J. of the Acad. Mark. Sci. 38, 759–774 (2010). https://doi.org/10.1007/s11747-010-0189-2

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Keywords

  • Difference aversion
  • Discrete-choice
  • Fairness
  • Price transparency
  • Cost transparency
  • Supply-chain