Professor Allan Chen Studies the How and Why of Asymmetric Pricing

Remember a few years ago when airline ticket fares increased dramatically due to surcharges which were added quickly in response to sharply rising fuel costs? Even though fuel prices have moderated substantially, many, if not most, of the higher fares are here to stay. And yet such pricing practices, dubbed “asymmetric pricing” by academics, seem to be less prevalent in other parts of the world. For example, similar fuel surcharges were revoked in Japan and the Philippines.

Allan Chen, professor and Gatton Endowed Chair in Marketing in the University of Kentucky's Gatton College of Business and Economics, wondered how and why this is the case and together with several colleagues, undertook a research project aimed at finding answers. Now, Chen is the lead author on an article recently accepted for publication in the Journal of Consumer Research titled, “Culture, Relationship Norm, and Dual Entitlement.”

According to Chen, a variety of explanations have been suggested to explain the prevalence of so-called asymmetric pricing, where prices increase quickly when costs increase, but decrease more slowly or not at all when costs go back down. Some explanations include the cost to adjust prices, inventory costs, inflation, or even that the consumer is not paying attention. But Chen’s research shows that a key explanation is simple — what the consumer will perceive as fair.

Nobel laureates Daniel Kahneman and Richard Thaler, together with their colleague Jack Knetsch, proposed the notion of fairness in this context. Consumers accept it as fair for firms to increase prices when costs increase to protect their profit. That is, firms are entitled to a reference profit. In addition, consumers accept it as fair for firms to maintain prices when costs decrease, because maintaining prices does not violate the consumers’ entitlement to a reference price. The principle of "dual entitlement" thus offers an explanation for the prevalent practice of asymmetric pricing.

The work done by Chen, along with co-authors Lisa Bolton, Sharon Ng, Dongwon Lee and Dian Wang, builds on Kahneman, Thaler and Knetsch’s work and investigates cultural variations in making generalizations about the dual entitlement principle and the practice of asymmetric pricing.

“We find that consumer fairness perceptions for pricing vary across cultures, industries and individuals,” Chen said. “For example, we find that consumers in interdependent countries like Singapore judge asymmetric pricing to be less fair than do consumers in independent countries like the U.S.”

Chen added his group attributes the cultural differences to the effects of relationship norms.

“Consumer fairness perceptions are higher in independent cultures where exchange norms that emphasize self-interest pursuit are prevalent, but are lower in interdependent cultures where communal norms that emphasize caring for others are prevalent. By the same token, consumers are more receptive of asymmetric pricing when dealing with their financial advisors than with their medical doctors.”

In addition, the research by Chen and colleagues suggests that firm benevolence can mitigate unfairness perceptions, but only when implemented appropriately.

“For example, fulfilling corporate social responsibilities such as providing services to the community when practicing asymmetric pricing can enhance price fairness perceptions among interdependent consumers,” Chen said. “In contrast, providing better customer service does not do so, as it is perceived as fulfillment of the buyer-seller transaction and thus expected by consumers of all cultures.”

The bottom line for companies and their managers: Pricing strategies need to be adapted to suit different markets, industries and cultures, and global companies that fulfill corporate social responsibilities are in a better position to mitigate unfairness perceptions arising from asymmetric pricing.