Brands that are tempted to raise prices during this time of scarcity are likely to be punished by consumers afterwards, as experiments show they don’t tolerate those who take unfair advantage of market power.
Last week, The Sunday Times reported that some supermarkets were bumping up their prices amid coronavirus-inspired panic buying.
This would make sense from a business-as-usual perspective on supply and demand, but in these strange times, brands should be cautious. There’s a body of psychological evidence showing that people will punish those who behave unfairly.
The ‘ultimatum game’
The man who first showed the danger of breaking fairness norms was Werner Guth, a psychologist at the University of Cologne. In 1982 he invented his infamous ‘ultimatum game’. The set-up was simple. Guth recruited pairs of people, with one participant given the role of the proposer, the other the receiver.
The proposer was given a sum of money, say £20, and told to split the cash with the receiver as they deemed fit. The receiver – who was kept separate from the proposer – was given just two options. He or she could accept the offer without negotiation; or reject it, in which case both parties receive nothing.
Before Guth’s experiment, most economists believed that receivers would accept an uneven split, say £5 of the £20. After all, they were better off if they agreed.
But that’s not what happened.
When proposers offered grossly unfair splits – say, keeping 80% of the cash for themselves – most receivers rejected the deal.
In Guth’s experiment, people were prepared to punish the transgressor, even at a cost to themselves.
Is price gouging seen as unfair?
While the ultimatum game is interesting, it doesn’t prove that price rises in times of desperation are seen as unfair.
But another experiment, led by the Nobel laureate Daniel Kahneman, makes just that case. In 1986, he told 107 Canadians about a fictitious hardware store that had been selling snow shovels for $15, but after a storm increased the price to $20. When Kahneman questioned participants about the price rise, an overwhelming majority of 82% rated it as unfair.
“People are acutely sensitive to unfair behaviour and they’ll punish perpetrators.”
In Kahneman’s words, “many actions that are both profitable in the short run and not obviously dishonest are likely to be perceived as an unfair exploitation of market power”.
Many brands are in a position to capitalise on public panic but doing so would be foolhardy. People are acutely sensitive to unfair behaviour and they’ll punish perpetrators.
So, the best advice? Spurn the opportunity for a quick buck and take a long-term view.
It might cost you in the short term but, as Bill Bernbach said, “a principle isn’t a principle until it costs you money”.
This was initially published in Marketing Week and co-written by Richard Shotton and Will Hanmer-Lloyd. To read the original article please follow this link.