Expected Price and Fair Price: Conceptual and Empirical Distinctions

measured.
When measured as an index including fair price then one-time price promotions are
sufficient to reduce reference price. However, when measured as expected price then one-time
price promotions are not sufficient to reduce reference price. Frequent price promotions
consistently change reference price, whether measured as an index or as an expected price.
Thus, one explanation for these findings could be the fragmented nature of reference price
measurement and the variety of different measures that have been used in the literature. This
issue is not new to the literature and several studies make calls for further research and
integration in the area (Bearden et al., 1992; Chandrashekaran and Jagpal, 1995; Garbarino and
Slonim, 2003; Lowe and Alpert, 2007; Mazumdar, Raj, and Sinha, 2005). However, despite the
importance to consumer behavior of understanding reference price measurement, few studies
examine the issue in any depth for direct measures of reference price using survey based
approaches (some notable exceptions are Garbarino and Slonim, 2003, Bearden et al., 1992 and
Chandrashekaran and Jagpal, 1995). Thus, a need exists for consensus and theory about which
reference price measures are evoked under different circumstances. This illustrates the need for
further replication of existing reference price phenomena under new circumstances.
Expected price and fair price

Conceptual and empirical distinctions
Despite the plethora of measures identified in the literature, two related, yet conceptually distinct
concepts are commonly cited; an expected price (Chandrashekaran and Jagpal, 1995; Kalwani
and Yim, 1992; Mazumdar, Raj, and Sinha, 2005; Thaler, 1985; Urbany, Bearden, Kaicker, and
Smith-de-Borrero, 1997), and a fair price (Bolton, Warlop, and Alba, 2003; Campbell, 1999;
Grewal, Monroe, and Krishnan, 1998; Monroe, 1973; Xia, Monroe, and Cox, 2004). An
expected price can be described as a reference price based on consumers memory or

contextual information (Mazumdar, Raj, and Sinha, 2005, p. 98) and relates to a positivistic
belief about the products price, using past prices as the frame of reference. Though expected
prices have been measured directly (through survey approaches) and indirectly (through the use
of past prices based on scanner data), conceptualizations typically involve an average based on
past prices with different time lags and different weightings (for a review of models of price
expectations see Mazumdar, Raj, and Sinha, 2005, p. 89). Typically such models suggest that the
most recent prices are the most influential in forming price expectations. Furthermore,
consumers also rely on the existence of promotions as a proxy for further promotions. More
frequent promotions are associated with expectations of future deals, and this reduces expected
price (Kalwani, Yim, Rinne and Sugita, 1990). Therefore, typical antecedents to ones price
expectations include the range of past prices one has been exposed to, with a greater weighting
given to the most recent prices, and promotion frequency.
The concept of fairness has attracted increased attention in the marketing literature
recently (Campbell, 1999; Xia, Monroe, and Cox, 2004), and relates to a normative belief about
what a product should cost (Bearden et al., 1992; Mazumdar, Raj, and Sinha, 2005). Primarily a
fair price is based on what is deemed reasonable, acceptable or just by consumers (Bolton,
Warlop, and Alba, 2003; Xia, Monroe, and Cox, 2004). Xia, Monroe, and Cox (2004, p. 3)
provide the most comprehensive discussion of the concept in their seminal article and define
fairness as a consumers assessment and associated emotions of whether the difference (or
lack of difference) between a sellers price and the price of a comparative other party is
reasonable, acceptable, or justifiable. Fair prices are conceptually distinct from competing
measures based on price expectations (Darke and Dahl, 2003; Thaler, 1985). For instance,
Garbarino and Slonim (2003) propose that fair price will always be lower than expected price
because consumers do not have knowledge of the firms actual profit margins, and thus assume
the firm is making a reasonable profit even at the lowest observed price. This is justified on the
basis of the principle of dual entitlement (Kahneman, Knetsch, and Thaler, 1986), where buyers
perceive that sellers are receiving a reasonable profit (otherwise they would not be selling), and
they themselves are attaining reasonable value from the transaction. Based upon this premise the
lowest prices observed tend to be more heavily weighted and have a larger impact on the
formation of a fair price than they have for an expected price. This assertion is consistent with
the empirical results of Lichtenstein, Burton, and Karson (1991). In their research the fair price is
significantly lower than the normal price in the presence of a price promotion (normal price is
conceptually and empirically similar to an expected price e.g., see Bearden, Kaicker, Smith-deBorrero, and Urbany, 1992).
Bolton, Warlop and Alba (2003) define perceived fairness as whether an outcome and/or
a transaction process are seen by consumers as reasonable, acceptable and just. Xia, Monroe and
Cox (2004) add that all fairness perceptions are comparative in nature. Therefore, in essence, the
concept of fair price relates to a normative notion of what consumers believe the price should be,
rather than what the price is expected to be.
A fair price is defined as how much a customer thinks a service (or good) should cost,
and so to assess the fairness of a price, customers may rely on the last price paid, the price most
frequently paid, market prices or posted prices (Kahneman, Knetsch, and Thaler, 1986). Haws
and Bearden (2006) have examined fairness response to differential pricing across consumers
and found that paying a higher price than another customer for the same product from the same
vendor at the same time leads to strong perceptions of unfairness relative to price differences
across products, vendors or time (Bolton, Keh and Alba, 2010).
Interestingly, the framing of the price has a significant effect on how fair the price is
perceived to be. Prospect theory suggests that consumers perceive prices framed as gains as
fairer than those framed as losses, even if the situations are economically equivalent (c.f. Chen,
Monroe and Lou, 1998). So for example, a buy one get one free may be perceived to be fairer,
than a fifty percent discount in some circumstances.
Several studies show an empirical association between expected price, fair price, and
other reference price concepts. For example, Folkes and Wheat (1995) create an index from
measures of reservation price, fair price, reasonable price and expected price ( = 0.92).
Similarly, Chandrashekaran and Grewal (2006) create an index from measures of fair price,
normal price, lowest price and highest price ( = 0.88).
Other studies also note the somewhat strong association between the different measures.
In trying to distinguish between competing measures used in the literature, Bearden et al. (1992)
find that the normal, expected and average prices tend to have the same mean as each other but
different means to the fair price. These results are somewhat consistent with the findings in
Lichtenstein, Burton, and Karson, (1991). Thus, normal and average prices appear to be
measuring the same construct as expected price (this finding makes intuitive sense given all of
these relate to some kind of historical based reference price). In particular, they find support for
expected price over fair price, whereas Chandrashekaran and Jagpal (1995) find support for fair
price over expected price. Garbarino and Slonim (2003) also note the high correlation between
expected price, fair price and reservation price, and find that fair price is lower than expected
price, and that fair price perceptions are most likely to be associated with perceived
expensiveness. Chandrashekaran (2001) uses fair price, reservation price, lowest price and
normal price and compares a non-unitized model of reference price formation with a unitized
model of reference price formation, finding that reference price utilization is individual specific
and moderated by the concept of involvement. Therefore, prior research has typically argued that
fair price and expected price are conceptually distinct (Garbarino and Slonim, 2003; Mazumdar,
Raj, and Sinha, 2005). Yet, much empirical research has assumed they are conceptually similar
and can be summated as a multi-item scale (Chandrashekaran and Grewal, 2006; Folkes and
Wheat, 1995). Research has yet to examine the degree of association between these concepts
when measured within the same survey, and compare this to when they are measured
independently.
Carryover effects in reference price research

To date all studies examining the distinct effects of different reference price concepts ask
respondents their reference price perceptions within the same survey. Asking respondents to
answer these questions within one survey may lead to carryover effects (Bickart, 1993).
Carryover effects refer to the cognitive processes that affect how respondents answer survey
questions. Rather than answering survey questions by retrieving information from memory,
carryover effects imply that respondents use prior survey questions to influence their response to
subsequent survey questions, because they may construct answers on the spot (Simmons, Bickart
and Lynch, 1993). Therefore, we might expect that if a respondent was asked what their expected
price for a product was and then asked about their fair price for the same product, the expected
price might influence the fair price (and vice versa). The existence of carryover effects is not
new to survey research (e.g., see Schwarz, Strack, and Mai, 1991 or Tourangeau, Rasinski,
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expected price can be described as a reference price based on consumers memory or

Carryover effects in reference price research

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