Ann Mirabito, Baylor University Mona Srivastava, Harvard Business School India Research Centre

1. Mirror, Mirror on the Wall, Who Is the Unfairest of Them All?Price Unfairness Perceptions of Goods versus Services Ann Mirabito, Baylor University Mona Srivastava, Harvard Business School India Research Centre Haipeng (Allan) Chen, Texas A&M University Behavioral Pricing Conference - September 2008

2. Motivation • Topical: Anger over healthcare costs • Americans spend 25% more on car payments each year • Product differences have the greatest effect on evaluations of price comparisons (Xia, Monroe, Cox 2004) • Which are fairer: goods or services? • Call for research into the difference in price fairness for goods versus services (Bolton, Warlop, Alba 2003) • Important domain • Services represent 2/3 of US GDP (usinfo.state.gov) • Service component of products is growing (Lovelock 2004, Vargo and Lusch 2004)

3. Which Is Fairer: Goods or Services? Service prices are subject to greater scrutiny! • Intangibility hampers customers’ ability (Berry and Yadav 1996) • To discern sellers’ costs • To fully evaluate product benefits, particularly with credence services No! Service prices have more flexibility! • Service (babysitter) is fairer than good (rented game) (Bolton, Warlop, Alba 2003) • Intangibles have more price flexibility when increased costs are not alignable (e.g. a rent hike) (Bolton and Alba 2006) • But buyers are more willing to reimburse a seller’s tangible costs than intangible costs (labor), thus limiting service seller’s ability to fully recapture costs. (Bolton and Alba 2006)

4. Initial exploration:“In general, how fair are the prices of …” • Product categories stimulated by Zeithaml (1981) • Goods prices are more fair (F (1, 32) = 39.24, p < .001) • Not driven by price points 1 = Not fair, 4 = equally fair, 7 = fair

5. Research Design Research Questions Approach Series of experiments isolating IHIP Willingness and ability to DIY Converging evidence from 12 studies Experimental surveys Within and between subject design n=2,000+ Robust results • Which is fairer: goods’ prices or services’ prices? • Do the distinguishing characteristics of services influence price fairness perceptions? • Intangibility • Heterogeneity • Inseparability • Perishability • How do the buyer’s willingness and ability to DIY (more commonly associated with services) moderate this effect?

6. CONSUMER’S VALUE CONSUMER’S DIY PROPENSITY PRODUCT TYPE (GOOD vs. SERVICE) (UN)FAIRNESS Willingness • EVALUATION Ability • • Intangibility • Heterogeneity • Inseparability • Perishability SELLER’S PROFIT Conceptual Model Transactional similarity

7. Intangibility • Product cannot be seen, touched or smelled (Shostack 1977) • Impedes buyers’ ability to assess product features (Berry and Yadav 1996; Peck and Childers 2003) • Promotes mental intangibility (clear mental image) (Laroche, Bergeron and Goutaland 2001) • Impedes evaluation of product benefits and value • Implies production costs (labor and overhead) will be underestimated and sellers’ profits will be overestimated (Bolton, Warlop and Alba 2003) Intangibility increases unfairness perceptions by: H1a: lowering value perceptions H1b: increasing seller’s profit perceptions

8. Intangibility • Product cannot be seen, touched or smelled (Shostack 1977) • Impedes buyers’ ability to assess product features (Berry and Yadav 1996; Peck and Childers 2003) • Promotes mental intangibility (clear mental image) (Laroche, Bergeron and Goutaland 2001) • Impedes evaluation of product benefits and value • Implies production costs (labor and overhead) will be underestimated and sellers’ profits will be overestimated (Bolton, Warlop and Alba 2003) Intangibility increases unfairness perceptions by: H1a: lowering value perceptions H1b: increasing seller’s profit perceptions

9. Intangibility Stimulus Your year-old $299 stereo breaks down and is of no use. You go to the store and [Intangible: find that the repair charge will be $150./ Tangible: see a reconditioned stereo (same brand, same model) advertised for $150.] • 1 x 2 (intangible repair/tangible reconditioned) between subject design • Measures 7 point Likert scales • How fair is the price? (1=completely unfair, 7 = completely fair) • Quality • Value • Profit

10. Intangibility Stimulus Findings Wave 1 n=123 Tangible (reconditioning) is fairer (2.68 < 4.20, F (1, 121) = 29.81, p < .001) Wave 2 n = 53 Main effects: fairness (p < .001), perceived value (p < .001) and perceived profit (p < .005) but not perceived quality (p = .66). Perceived value – not profit – mediate the difference (Baron and Kenny 1986) Your year-old $299 stereo breaks down and is of no use. You go to the store and [Intangible: find that the repair charge will be $150./ Tangible: see a reconditioned stereo (same brand, same model) advertised for $150.] Conclusion: Intangibility seems to create unfairness perceptions through perceived value (H1a) but not perceived seller’s profit (H1b).

11. Heterogeneity • Service quality may vary with each performance. (ZPB; Murray and Schlachter 1990) • Greater perceived variability reduces value (Rust, Inman, Jia, and Zahorik 1999). • Risk averse buyers demand a discount in the face of uncertainty (Nagle 1984). • Information asymmetry  sellers to deny that discount. • Increases buyers risk, a risk buyers may attribute to seller’s poor motives and high profit orientation. Heterogeneity increases unfairness perceptions by: H2a: lowering value perceptions H2b: increasing seller’s profit perceptions

12. Heterogeneity: Design Stimulus You and your friends are going to Cancun for Thanksgiving vacation. You check out resorts on the web and select an all inclusive resort. The website you are using shows satisfaction reports from prior guests. Overall, the rating is 3 stars (0 stars = worst and 5 stars = best), but you notice that half the vacationers gave it very good ratings ("best ever!") while the other half gave it very poor ratings ("the hotel is terrible"). It costs $1,700. Just as you are about to book the resort, you realize it’s sold out for Thanksgiving. Then you see another resort with similar amenities. Prior guests also rated its quality 3 stars (0 stars = worst and 5 stars = best) and you notice that almost all of the vacationers rated it exactly at 3 stars. The second resort is priced at $1,700. How fair is the price of the second resort compared to the price of the first resort? • Measures 7 point Likert scales • Fairness • Quality • Value • Profit

13. Heterogeneity: Findings • Wave 1 n=23 • Compared rating to midpoint of the scale (4) • Consistent quality is fairer (4.88 > 4, t22 = 5.35, p < .01) • Wave 2 n = 42. Consistent quality is • More fair (4.67 > 4, t (41) = 3.15, p < .005) • Higher value (4.45 > 4, t (41) = 2.15, p < .05) • Equal profit (4.29 vs. 4, t (41) = 1.50, p = .142) • Regression: Y (fairness) on Perceived Value (p>.01), Perceived Profit (p>.05) Conclusion: Heterogeneity seems to create unfairness perceptions through perceived value (H2a) but not perceived seller’s profit (H2b) .

14. Perishability • Service cannot be stored  no residual value. • Buyers have “nothing to show” for the purchase, depressing value perceptions • Perishability encourages dynamic pricing (Berry and Yadav 1996), a practice consumers dislike (Haws and Bearden 2006, Kimes and Wirtz 2003) • Buyers may scrutinize costs more carefully when the benefit is short-lived Perishability increases unfairness perceptions by: H3a: lowering value perceptions H3b: increasing seller’s profit perceptions

15. Perishability: Research Design Approach: Manipulate the residual value of the product itself. You’ve invited 50 friends for a big party. You plan to serve frozen drinks (slushies or margaritas) and you decide that using a frozen drinks machine will be more economical, easier and more fun than preparing drinks with a blender. At the store, you see that you can rent a frozen drinks machine for $110 or you can buy one for $185. There’s a 50-50 chance you will need a frozen drinks machine one more time before graduating. If you buy the machine, you have plenty of storage space for it, but you realize there’s no resale value. • Measures 7 point Likert scales • Fairness (renting is fairer, buying is fairer) • Quality • Value • Profit • Expected reuse

16. Perishability: Findings Approach: Manipulate the residual value of the product itself. You’ve invited 50 friends for a big party. You plan to serve frozen drinks (slushies or margaritas) and you decide that using a frozen drinks machine will be more economical, easier and more fun than preparing drinks with a blender. At the store, you see that you can rent a frozen drinks machine for $110 or you can buy one for $185. There’s a 50-50 chance you will need a frozen drinks machine one more time before graduating. If you buy the machine, you have plenty of storage space for it, but you realize there’s no resale value. • Note that economically, one would be worse off buying the machine: • Expected cost of buying = $185 • Expected cost of renting = $165 (i.e., $110 + $110 * 0.5). • Buying is: • Fairer (5.80 > 4, t48 8.80, p > .001) • Better value (5.46 > 4, t (48) = 6.55, p < .001) • Lower profits (3.22 < 4, t (48) = 4.66, p < .001). • Regression: Y (fairness) on • Value (regression coefficient = .45, p = .003) • Perceived profit (regression coefficient = -.17, p = .24) • Prediction of future usage (regression coefficient = -.62, p = .34). Conclusion: Perishabilityseems to create unfairness perceptions through perceived value (H3a) but not perceived seller’s profit (H3b) .

17. Perishability II: Research Design You’re going on vacation. When you get off the plane, you find a shuttle service that will take you from the airport to the resort which is about two hours from the airport. The shuttle service charges $110 each way or $185 if you buy the roundtrip ticket today. You think there’s a 50-50 chance you will use the return portion. The ticket is non-transferable and has no resale value. • Note that economically, one would be worse off buying the machine: • Expected cost of buying = $185 • Expected cost of renting = $165 (i.e., $110 + $110 * 0.5). • Round trip is fairer (2.51 < 4, t46 = 6.13, p = .000), Conclusion: Perishabilityseems to create unfairness perceptions through perceived value (H3a) but not perceived seller’s profit (H3b) .

18. Inseparability • Production and consumption occur at the same time • Buyer is often present in the service factory  may make salient the imputed wages of the service provider • Equity theory: buyers compare their costs and benefits with sellers’ (Martins and Monroe 1994) • Unreasonably high hourly price  negative evaluation, especially with human resources (Campbell 2007) • Attribute seller’s motives to desire for superior rents High imputed hourly wages increases unfairness perceptions by: H4a: lowering value perceptions H4b: increasing seller’s profit perceptions

19. Inseparability Stimulus Your sister has been seriously injured in an auto wreck caused by a drunk driver. You have retained a well-known attorney to represent your sister in negotiations with the drunk driver’s insurance company. The attorney agrees to represent your sister on a contingency basis in which the attorney will retain 1/3 of any settlement to cover all legal expenses and the attorney’s profit. You will have no out-of-pocket legal expenses.[The high profile attorney is known for working hard to represent clients. Indeed, the attorney works for three years preparing the case. The case is settled on your sister’s behalf, securing a $3 million settlement for your sister, and the attorney retains $1 million. / The high profile attorney has an excellent track record for winning cases. Indeed, your brother-in-law, a lawyer, says insurance companies dread the prospect of dueling with your attorney in court. The attorney writes a letter to the insurance company followed by two telephone calls to the insurance company on your sister’s behalf, secures a $3 million settlement for your sister, and retains $1 million.] 1 x 2 (low wage/high wage) between subject design • Measures: Fairness, Value, Profit • N = 84

20. Inseparability Findings • Planned contrasts show that the high wage attorney is • less fair (4.46 < 5.56, t (82) = 3.22, p = .002) • less value for his service (4.51 < 5.23, t (82) = 2.90, p = .005), and • making a higher, though statistically not different, profit (3.00 < 3.44, t (82) = 1.83, p < .10). • An ANCOVA with perceived value and perceived profit as two covariates revealed that the effect was mediated by perceived value, but not by perceived profit (p < .001 for value; p > .05 for perceived profit; p = .131 for the manipulated factor). Conclusion: High imputed wages seem to create unfairness perceptions through perceived value (H4a) but not perceived seller’s profit (H4b) .

21. CONSUMER’S VALUE PRODUCT TYPE (GOOD vs. SERVICE) (UN)FAIRNESS EVALUATION • Intangibility • Heterogeneity • Inseparability • Perishability SELLER’S PROFIT Summary Intangibility, heterogeneity, and perishability create unfairness perceptions through perceived value but not perceived seller’s profit. Inseparability primes labor awareness which creates unfairness perceptions through perceived value but not perceived seller’s profit.

22. Willingness and Ability to DIY • Paying someone else requires an out-of-pocketcost of money, whereas DIY requires an opportunity cost of time • Money is valued more highly than time • Out-of-pocket costs are valued more highly than opportunity costs (Kahneman and Tversky 1979, Thaler 1985, Northcraft and Neale 1986). • And the monetary value of time is malleable (Okada and Hoch 2004) • High willingness and ability to DIY may diminish expectations of the seller’s costs Willingness and ability to DIY increases unfairness perceptions by: H5a, H6a : lowering value perceptions H5b H6b : increasing seller’s profit perceptions

23. Willingness and Ability to DIY Stimulus The service person said that the problem was due to malfunctioning software which can be fixed by installing and running a special program on your computer.  [You bought a CD from the service company and installed it / You downloaded a program from the service company’s website and installed it]. You paid $100 for the [CD / program]. • Ability manipulation: computer science major/liberal arts major • Willingness manipulation: you have the time and interest/don’t have the time and interest 2 (hi/lo willingness) x 2 (hi/lo ability) x 2 (good/service) between subject design • Measures: Fairness, Manipulation checks • N = 160 • Findings: • Good is fairer than service only when ability is high - Willingness not significant

24. CONSUMER’S VALUE CONSUMER’S DIY PRODUCT TYPE (GOOD vs. SERVICE) PROPENSITY (UN)FAIRNESS Willingness • EVALUATION Ability • • Intangibility • Heterogeneity • Inseparability • Perishability SELLER’S PROFIT Summary and Contribution • Explicate the roles of IHIP in price fairness perceptions • Services consistently found to be less fair than goods • Differences driven by perceived value rather than perception of seller’s profits • Service fairness perceptions can be improved by lowering perceived ability to DIY • Managerial implications • Lessen value uncertainty • Lower perceived ability to DIY

25. Future Research • Examine price fairness perception influence of other product characteristics • Search, experience, credence • Directly study how uncertainty and risk interact with product attributes in affecting fairness evaluations • Expand understanding of DIY • Focus on consumers’ decisions regarding the time-money tradeoff