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Price Discrimination, Rule Familiarity and Consumer Trust

McMahon-Beattie, Una and Palmer, A (2010) Price Discrimination, Rule Familiarity and Consumer Trust. In: International Colloquium on Relationship Marketing, Henley Business School, Reading. Henley Business School. [Conference contribution]

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Abstract

Trust is a complex relational construct which has received much attention in marketing literature in recent years. Indeed it has been seen to be at the philosophical heart of Relationship Marketing with its focus on establishing, developing and maintaining effective, ongoing relational exchanges (Morgan and Hunt, 1994; Takala and Uusitalo, 1996) and it has been positioned as an important antecedent, mediator and outcome of buyer seller relationships.In the service industries where demand is variable and fixed costs are a high proportion of total costs, the practice of Revenue Management through variable pricing has become widely accepted as a method for maximising financial returns. However, price discrimination which is implicit in Revenue Management systems may undermine trust in an organisation, when consumers’ level of knowledge of the rules in which variable pricing operates is low or non-existant (McMahon-Beattie, 2009). Trust is at the heart of Relationship Marketing strategies, therefore there would appear to be a potential conflict between the aims and operation of Relationship Marketing/Customer Relationship Management and Revenue Management.There is considerable evidence of a widespread lack of sophistication in pricing methods used within the services industries, with a suggestion that various forms of cost-based pricing predominate (Zeithaml et al., 1985). This lack of sophistication implies lost profit opportunities, and Revenue Management tries to reconcile supply and demand though the price mechanism and exploit “consumer surplus”. This is understood by economists as the difference between the price that a consumer actually pays for a product, and the highest price that they would actually be prepared to pay for it. Research on the perceptions of price differentials remains fragmented, especially within the context of capacity constrained services industries, and little is known about the impact of types of policies that may influence perceptions of fairness or trust in pricing (Guiltinan, 2006). This becomes an issue where modern IT based systems of individual pricing allow multiple prices to be charged for ostensibly identical units of output, and the “rules” associated with price differentials may not be transparent and may only be compared indirectly. This lack of openness in pricing creates conditions for mistrust. Garbarino and Lee (2003) have noted that dynamic pricing that results in unexplained price differentials leads to diminished trust in the seller. Kahneman et al. (1986) have examined how consumers' perceptions of the "fairness" of price increases were influenced by the circumstances that led to them. In line with the theory of dual entitlement, they found that buyers typically perceive a given price increase as "fair" if it is a reaction to an increase in seller costs, but as unfair if it is a reaction to increased consumer demand. Furthermore Haws and Bearden (2006) suggest fairness concerns limit consumer acceptance of individual level price discrimination while Bolton et al. (2010) indicate that consumer acceptance of the practice may vary over cultures. In relation to Revenue Management, Kimes (1994) noted that a lack of information regarding discounts was an issue of concern to buyers. Furthermore Choi and Mattila (2006) have contended that the provision of an appropriate level of information on the hotels’ pricing policy is believed to have a positive impact on customers’ perceived fairness of Revenue Management. Rohlfs and Kimes (2005) indicate that consumers (in hotels) will accept the idea of variable prices as long as they understand that they are receiving the ‘best-available-rate’ for each night of a multiple night stay. Thus perceptions of fairness and trust seem to have a reciprocal relationship. Connected to the concept of fairness is that of procedural justice. Thibaut and Walker (1975) found that the primary element of this, in terms of the law, was process control or influence. As the concept was extended to organisational research additional elements were added in relation to policies or procedures e.g. consistency of application across individuals and time and ensuring that accurate and complete information is exchanged (Colquitt et al., 2001; Guiltinan, 2006). Inherent within procedural justice is the dimension of informational justice which is ‘concerned with the communication of the process about the rules for obtaining a discount’ such as the quality of the explanations’ (Guiltinan, 2006:389). In relation to Revenue Management, Kimes (1994) found that customers perceive discounting unfair when they do not have the full information about options available. There is a shortage of studies in the area of Revenue Management that seek to integrate operational efficiency with human perceptions and attitude change.This research seeks to build on the theoretical foundations of social justice theories by exploring the hypothesis that individuals’ familiarity with the rules of price variability influence trust in an organisation. Faced with perceptions of variable prices, it can be hypothesised that the buyer who is familiar with the rules of pricing will remain trusting in the company, whereas the buyer who perceives variability that is not familiar with the rules may have their trust in the company reduced. Preliminary quasi-experimental research has been undertaken involving an ongoing longitudinal study in which manipulated price messages relating to a real service offer were sent to 2273 customers on a hotel chain’s database. The results have indicated that variable pricing in itself does not cause consumer trust/distrust. The results indicate that consumers’ level of knowledge of the "rules" in which variable pricing operates may well cause trust/distrust. From experience of the benefits that variable pricing may bring to a consumer, and based on an understanding of how and why these benefits may be obtained (for example, low hotel prices to clear spare capacity at a quiet time of year), consumers may come to trust a business’ use of variable pricing as a legitimate business practice.The effect of rule familiarity on the level of consumer trust remains under-researched and is the subject of this presentation. It will discuss the need for further research into a proposed construct for Rule Familiarity and the development of appropriate items for the construct. In practical terms consideration of the impact of rule familiarity on consumer trust will allow for more effective framing and presentation of price offer information and will therefore contribute to the development and maintenance of ongoing buyer-seller relationships. It will also potentially highlight any differences between customer segments and indeed between cultures.

Item Type:Conference contribution (Paper)
Faculties and Schools:Ulster Business School > Department of Hospitality and Tourism Management
Ulster Business School
ID Code:29330
Deposited By: Professor Una McMahon-Beattie
Deposited On:28 Apr 2014 13:40
Last Modified:28 Apr 2014 13:40

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