Sarah Maxwell, Ph.D., spent much of 2007 trying to understand what makes a price seem fair.
Photo by Bruce Gilbert
Although gassing up at the pump may seem like yet another chore in an industrialized world, the act of purchasing fuel can incite deep emotions, often causing drivers to make irrational decisions, according to Sarah Maxwell, Ph.D., associate professor of marketing.
It’s why many drivers will wait in long lines, she said, to save an average of two cents per gallon, all the while burning more gas while they wait to get to the pump.
“It’s hardly rational behavior,” said Maxwell, who is co-director of the Fordham Pricing Center. “Gasoline consumers act this way because they’re mad. They’re mad not only because the price of gas is high, but because they think the oil industry is acting unfairly.”
Maxwell is a national expert on fair pricing and will publish in January The Price is Wrong: Understanding What Makes a Price Seem Fair and the True Cost of Unfair Pricing (Wiley, 2008). Maxwell’s research has found that price fairness affects everyone—consumer and merchant—and that fairness, in effect, is the emotional part of economic decision making.
In fact, Maxwell said that without emotions, we wouldn’t be able to make purchasing decisions.
“You first evaluate whether you think a price is fair to you personally,” Maxwell said of the pricing model she developed while researching the book. “If it’s not too high, you go ahead and buy it. If it’s too high and you really want it, you think to yourself that it’s unfair and it makes you upset. And although it may initially provoke some anger, you then look at whether it adheres to the social norms.”
Social norms, the consensual rules of a society, guide many of our purchasing decisions often without us giving them a second thought, Maxwell said.
“Social norms are often tacitly understood,” Maxwell said. “Many times we don’t even recognize some of these. For example, the fact that elevators are free. Why don’t we charge for a person to get up to a certain floor?”
Social norms, by their very nature, are all over the map—literally and figuratively. What is the norm in one country may not be in another. “In Slovakia, some restaurants charge tourists extra for mustard and catsup,” Maxwell said. “In India, some nurses demand a tip to bring new babies to their mothers.”
Would such practices ever fly in this country?
Only if people adopted the new practice—the new norm, she said. And norms do change.
Take tipping, for instance.
“It’s basically un-American,” she said. “It was introduced in the United States by people who went to Europe in the 1800s, where tipping was common. When they introduced tipping in the United States, people thought it was terrible. Some states even had laws against it.”
Ironically, tipping is no longer a social norm in many European countries yet it is expected in the United States. American society came to accept tipping as the social norm.
There are different kinds of fairness in social norms when it comes to pricing, Maxwell said. On the one hand, there is personal fairness, essentially what a person considers to be a fair price because it meets their own personal standards. Social fairness, on the other hand, refers to a price that a person considers acceptable because it meets society’s standards.
The reaction to social unfairness can be ferocious.
“Consumers feel an irrational desire to ‘get back’ at the seller, even if it takes more effort than the money involved,” she said. “They will drive five minutes longer to avoid a pharmacy they feel prices unfairly.”
And people can even get killed over prices, Maxwell said, citing a 1997 incident in South Africa where residents of a mixed-race neighborhood rioted to protest water and electricity rates, which they said were higher than in the nearby black neighborhood.
“People were killed in these riots because one group saw prices as being unfair,” Maxwell said.
So what is a fair price?
“One that is emotionally okay,” Maxwell said. “It is a price that is acceptable and just one that has passed the test of personal and social fairness by adhering to the social norms.”
And when these norms are violated and the price is judged personally and socially unfair, watch out, Maxwell said.
“Emotions intensify and tempers flare,” she said. “Consumers will say ‘Play fair or I quit’ and companies had better take heed.”
