Consumer Behavior under Benevolent Price Discrimination

TL;DR

This paper investigates consumer reactions to benevolent price discrimination, revealing that many consumers oppose discounts for low-income groups despite potential benefits, driven by altruism and warm glow effects.

Contribution

It provides empirical evidence on consumer aversion to benevolent price discrimination and explores psychological motivations behind support or opposition.

Findings

Many consumers oppose discounts for low-income groups.

Support for discounts is driven by warm glow and altruistic preferences.

Price discrimination attracts some high-income consumers but doesn't fully offset losses.

Abstract

Extensive research shows that consumers are generally averse to price discrimination. However, instruments of differential pricing can benefit consumer surplus and alleviate inequity through targeted price discounts. This paper examines how these outcome considerations influence consumer reactions to price discrimination. Six studies with 3951 participants show that a large share of consumers is willing to costly switch away from a store that introduces a discount for low-income consumers. This happens irrespective of whether income differences are due to luck or merit. While the price-discriminating store does attract some new high-income consumers, it cannot compensate the loss of existing consumers. Allowing for altruistic preferences by simulating a market mechanism increases costly support for price discounts, but does not alleviate consumer aversions. Finally, we provide evidence that warm glow drives costly support for price discounts.