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Business Studies

Business Studies: Chair

The focus of the new Business Studies' Chair is on academic business research, in particular related to consumer pricing and its legal implications. “Product and services pricing are a vital aspect of society, and thus play an important role in the legal field”, says Professor of Business Studies at the University of Leiden, Jean-Pierre van der Rest. "The price you assign a product or service is one of the most difficult marketing decisions to take. It’s so important because it has a direct effect on profit”.

Pricing manifests itself in many ways. For example, rent is the amount you pay for something that is put to use, canon is the amount to be paid annually for ground lease, a premium is the price of insurance, an entry fee is the price to you pay to enter, the tariff is the amount paid per unit, etc. Price is also used in legal terminology, for example the ‘price’ you pay for different criminal acts: default, an offense, or a wrongful act, in other words, the price of the unacceptable. This range of manifestations suggests that pricing affects many different legal fields. For example, there are countless laws, ministerial regulations, general rules of governance, and other royal decrees in the Netherlands. There are even laws which include the term price in the law’s name, for example, the medicinal pricing act, the fixed book price act, or laws that are specifically aimed at regulating price, for example in case of inflation (the Prices Law) or extraordinary circumstances (Emergency Prices Act). When determining their verdict, judges are deemed to stipulate whether the price, in whatever capacity, 'reasonable', 'fair', 'acceptable', 'cost-covering', 'market-conform', 'usually stipulated', 'too low' or 'too high'. This can be a difficult task, even impossible in some cases, especially with regard to goods where no 'commonly stipulated' prices apply' (Wessels, 2015: 110).

Only in recent decades have Business Studies researchers started to investigate the societal implications of pricing. Authors like Grewal and Compeau (1999) have developed a conceptual framework to investigate the relationship between price as a 'value capturing' marketing tool and the implications of price on consumer-welfare implication. They identify five focus areas at the level of producer, retail and consumer. The aim of the framework is to encourage research that provides insights into how companies can meet their objectives without denying consumers a fair market. They have evaluated well-known competition issues such as price agreements, vertical price maintenance, prices after mergers, breakdown prices, barter prices, and transfer prices. Two issues at retail and consumer level spearhead the future research direction of the Business Studies Chair.

Firstly, Professor Van der Rest expects an increase in 'segmented dynamic pricing'. With the growth of the internet, big data and high-tech marketing, personalized pricing (i.e., first-degree or individual price discrimination) is no longer a theoretical issue for both existing and new customers, and for services or products. What this means for the consumer is a complex issue and it depends partly on the context and the assumptions that are made. The literature indicates that consumers fairly quickly become aware how they behave strategically to ‘defend themselves’ from dynamic pricing (e.g., Villas-Boas, 2004; Acquisti & Varian, 2005).

Research by Chen and Zhang (2009) shows that even in strategic behaviour, 'dynamic targeted pricing' can be profitable if the consumers can be recognized by their purchase history. The paradox of their model is that monopolists cannot take advantage of this pricing method; oligopolists benefit because of a decline in price competition. Because 'dynamic target pricing' enables a company to encourage non-loyal customers to purchase more, the market size increases, and with it, prosperity. Nijs (2017), however, shows that if competitors share customer profile data, their profit will increase at the expense of the consumer. His research is interesting because it makes clear that data exchange can increase the profit effect of behaviour-based price discrimination. Belleflamme and Vergote (2016) show that even when a company has a chance of obtaining information about individual value perceptions, consumers are collectively better off without 'privacy' protective measures. Consumers who cannot protect their digital-trace or activities, pay the (higher) price. In addition, it is not inconceivable that companies can dream-up gimmicks to make price comparison difficult or even impossible, for example by the personalisation of the search results (i.e., 'search discrimination'). There are also media platforms that consciously try to mislead consumers. It can therefore become much more difficult for consumers to get an idea of market price levels (Ezrachi & Stucke, 2016).

However, little research has been done into the behavioural consequences that consumers attach to their negative emotions. As Feder Mayer and Avila (2013: 566) describe, "The field lacks empirical studies that examine the unfairness perceptions and the lives of emotions in situations of price increases, as well as the consequences of such increases in terms of behavioural intent." We are therefore unable to predict what consumers will do with their negative emotions as a result of behaviour-based dynamic price discrimination. We also do not know whether and why consumers differ in this, and what they will do when they depend on a provider, or if they attach great importance or value to a product or service. With the advent of the internet, there is potentially more consumer power than ever before. A better understanding of how consumers respond to 'perceived price unfairness' will provide further insights into this new power.

Now we arrive at the second major issue at the level of retail and consumer that interests Professor van der Rest: what if price temptation becomes so ingenious that it is difficult to determine whether there is an issue of misleading pricing?

Companies have a wide range of pricing strategies and tactics to tempt consumers. For example, there are forms of indirect price discrimination: companies give consumers choices, varying in quality, characteristics, volume or conditions, so that they are divided into segments according to their preferences (McAfee, 2008). Consider, for example, 'quantity discounts' (e.g., 'value pack'), 'coupons' (e.g., Groupon), 'nonlinear pricing' (e.g., 'two-part tariffs'), 'price bundling' (e.g., menus), 'product crimping' (e.g., laser printers), 'price restrictions' (e.g., early booking discount), 'price knowledge' (e.g., 'upselling'). All these pricing strategies are legal. There are also many ways to make consumers feel that they are getting a good deal. These pricing strategies are not always permitted, for example if the information provided is incorrect. This kind of 'bargain insurance' is often used, for example in the form of 'everyday low pricing' (e.g., Danziger, Hadar & Morwitz, 2014), 'price-matching refunds' (Kukar-Kinney, Xia & Monroe, 2007), or splitting the price into mandatory parts (e.g., Hamilton & Srivastava, 2008), vague price comparisons (e.g., Grewal & Compeau, 1992; Compeau, Lindsey-Mullikin, Grewal & Petty, 2003), price references to the competitor (e.g., Pechmann, 1996) or themselves, such as from - for (e.g., Choi & Coulter, 2012), and 'percentage up to claims', such as discounts up to 70% (e.g., Pechmann, & Silk, 2013). These kinds of tactics are frequently used to deceive consumers. For example, the Dutch Consumer Association (2014) reported that online toy stores had been guilty of making fake offers for a long time (e.g., the 'from-price' was never valid).

There are two subjects to which deserve the special attention of the new Chair. Firstly, international research shows that courts and government agencies recognize that truthful advertising can also mislead consumers, for example, by using confusing language or omitting important information (Hastak & Mazis, 2011). In addition, Professor Van der Rest proposes an additional category of deceptions that he describes as 'accidental'. For example, there are regulations governing the price per unit of measurement, such as the price per kg on a price label. The literature confirms that this type of regulation works positively (e.g., Yao & Oppewal, 2016). In addition to 'scanner fraud' (e.g., omissions, errors), little is known about the different kinds of 'price confusion' (Grewal & Compeau, 1999). The literature in this area is scarce, but for example for 'scanner fraud' -i.e. ‘accidentally’ forgetting to enter a discount in the cash register - that more mistakes are made in wealthy than in poor postal code areas (e.g., Goodstein, 1994; Hardesty, Goodstein, Grewal, Miyazaki & Kopalle, 2014). It is questionable whether 'electronic shelf labels', which would be less susceptible to errors, but could also be used for 'dynamic pricing', will solve the problem. 

Secondly, neuromarketing is currently associated in the US with potential legal issues in the field of 'tort claims', 'privacy' and 'consumer protection' (Voorhees, Spiegel & Cooper, 2011). However, research with implications for pricing is still in its infancy (Hubert & Kenning, 2008). Plassmann, O'Doherty and Rangel (2007) reported that 'willingness to pay' is determined in the medial prefrontal cortex. So, in the future it may be better not to accept ‘free smart glasses’; Before you know it, you will be paying personalised prices everywhere. By then, that may no longer matter anyway! Adaval and Wyer (2011) show that subliminally-presented price anchors have an effect on 'willingness to pay'. Another interesting finding from neuromarketing is that the perception of unfair prices, monetary sacrifices and high prices activates the part of the brain that processes punishment (Sanfey et al., 2003). Knutson et al. (2007) also discovered that the brain’s reward system is not only be activated by food, but also by price reductions.

Thus, much ‘food for thought’….


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