The Achilles tendon of dynamic pricing –– the effect of consumers' fairness preferences on platform's dynamic pricing strategies

Abstract

PurposeIn this paper, the authors study the effect of consumers' fairness preferences on dynamic pricing strategies adopted by platforms in a non-cooperative game.Design/methodology/approachThis study applies fair game and repeated game theory.FindingsThis study reveals that, in a one-shot game, if consumers have fairness preferences, dynamic prices will slightly decline. In a repeated game, dynamic prices will be reduced even when consumers do not have fairness preferences. When fairness preferences and repeated game are considered simultaneously, dynamic prices are most likely to be set at fair prices. The authors also discuss the effect of platforms' discounting factors, the consumers' income and alternative choices of consumption on the dynamic prices.Research limitations/implicationsThe study findings illustrate the importance of incorporating behavioral elements in understanding and designing the dynamic pricing strategies for platforms and the implications on social welfare in general.Originality/valueThe authors developed a theoretical model to incorporate consumers' fairness preference into the decision-making process of platforms when they design the dynamic pricing strategies.