Pricing strategy & practice

The inuence of price fairness on customer satisfaction: an empirical test in the context of automobile purchases
Andreas Herrmann
University of St Gallen, St Gallen, Switzerland

Lan Xia
Marketing Department, Bentley College, Waltham, Massachusetts, USA

Kent B. Monroe
University of Illinois and University of Richmond, Glen Allen, Virginia, USA, and

Frank Huber
University of Mainz, Mainz, Germany
Abstract Purpose This paper aims to link conceptually the concepts of price fairness and customer satisfaction and empirically demonstrate the inuence of perceived price fairness on satisfaction judgments. Further, it seeks to examine specic factors that inuence fairness perceptions including price perception and consumer vulnerability. Design/methodology/approach The study is conducted in the context of automobile purchases in major German car dealerships. Based on a theoretical conceptualization of the constructs and an empirical pretest, 246 car buyers were surveyed and their fairness perceptions and satisfaction judgments with the car buying process measured. Findings The research shows that price perceptions directly inuence satisfaction judgments as well as indirectly through perceptions of price fairness. Results also indicated that consumers vulnerability, which is induced by a perceived demand-supply relationship and the urgency of need from the consumers side, had a negative effect on perceived price offer fairness. Research limitations/implications The research demonstrated the inuence of perceived price fairness on satisfaction judgments empirically. The study was conducted in the context of car purchases and the generalizability of the model should be further tested. Practical implications The effect of consumer vulnerability implies that sellers should not only avoid exploiting their customers but should also anticipate consumers potential feelings of being exploited. Being sensitive to the buyers psychological state and assuring buyers of fair treatment will enhance perceptions of price fairness without changing the price offer. Originality/value Both the direct and indirect effects of price perception on satisfaction judgment were examined in the paper. Specically, the inuences of consumer vulnerability and price procedure fairness on satisfaction judgments are new and contribute to the dual-entitlement principle and our existing knowledge in price fairness. Keywords Fair value, Customer satisfaction, Prices, Perception Paper type Research paper

Previous research on customer satisfaction has examined factors that enhance customer satisfaction in various contexts (for recent reviews see, Oliver, 1997; Szymanski and Henard, 2001; Shankar et al., 2003). As an important factor in the marketing mix, the role of product or service price in the

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formation of customer satisfaction has not been studied extensively in previous customer satisfaction research (Voss et al., 1998). When price has been included, it has been one of several product attributes considered relevant (Fornell et al., 1996; Voss et al., 1998); however, the unique inuence of product price on satisfaction judgments remains unclear. In this research we include consumers price perceptions as an important factor inuencing overall satisfaction judgments. This inuence is both direct, and indirect via price fairness perceptions. Voss et al. (1998) argue that satisfaction is a function of price, performance and expectations with support for the expectations-satisfaction link being weak. They propose that, in contrast to performance, perceived price fairness might be 49

The inuence of price fairness on customer satisfaction Andreas Herrmann, Lan Xia, Kent B. Monroe and Frank Huber

Journal of Product & Brand Management Volume 16 Number 1 2007 49 58

the dominant determinant of satisfaction. Their empirical results suggest that when there was a perceived priceperformance inconsistency (i.e., an inequitable or unfair outcome), it had a stronger effect (negative) on satisfaction judgments. Similar results were also found by Oliver and DeSarbo (1988) and Oliver and Swan (1989a). In addition, research also has shown that equity is related to satisfaction. Equity is a concept closely related to fairness and usually dened as a fairness, rightness, or deservingness judgment that consumers make in reference to comparative others (Oliver, 1997; Xia et al., 2004). A recent meta-analysis of the empirical research on customer satisfaction found that equity exhibited a dominant effect on satisfaction judgments with a correlation between equity and satisfaction of 0.50 (Szymanski and Henard, 2001). The correlation between expectations and satisfaction was a lower 0.27. However, relative to previous customer satisfaction research, little published research has linked perceptions of price fairness with satisfaction judgments. In this paper, we address this link. Specically, we extend Voss et al.s (1998) nding to the issue of perceived fairness. We include two components of price fairness (price offer vs procedure) as well as a consumer psychological characteristic (vulnerability) and examine their effects on satisfaction judgments. We begin with an overview of the satisfaction and fairness concepts leading to a conceptual model and hypotheses. An empirical test of the model using automobile purchases follows.

Conceptual framework
Customer satisfaction Various denitions and measures of customer satisfaction have been used in previous research (Szymanski and Henard, 2001). One approach has been to distinguish between transaction-specic and overall satisfaction (Oliver, 1997). We distinguish satisfaction with the purchase process (e.g. product comparisons and interactions with the sales people) and satisfaction with the purchase outcome (i.e. the product purchased). Previous research has shown that these two components of satisfaction are correlated but conceptually distinct (Bitner and Hubbert, 1994; Shankar et al., 2003). For example, in the context of using online decision aids, Bechwati and Xia (2003) found that peoples perceptions of how much effort the decision aids exert in providing the recommendations inuenced their satisfaction regardless of what options were recommended. Similarly, Spreng et al. (1993) proposed that customers satisfaction with the availability of product information when evaluating various product options has an important inuence on overall satisfaction judgments. These inuences may occur particularly for purchases that involve extensive information search and multiple interactions with the seller such as an automobile. The purchase of an automobile involves multiple stages including information search, comparison of alternatives, and interactions with the sales people or service provider. We propose that satisfaction with one stage of this purchase process will have a direct inuence on the satisfaction with other stages, especially when different aspects of the purchase process occur sequentially. That is, people are more likely to perceive subsequent purchase stages consistent with their initial judgment and any positive or negative affect that occurs during one purchase stage likely will carry over to the next stage. 50

Price fairness Recent research efforts have isolated several factors that inuence consumers price unfairness perceptions as well as potential consequences of these perceptions (Bolton et al., 2003; Campbell, 1999; Vaidyanathan and Aggarwal, 2003; Xia et al., 2004). Previous research has distinguished distributive fairness and procedural fairness. The principle of distributive fairness, or fairness of outcomes, maintains that individuals judge the fairness of a relationship based upon the allocation of rewards resulting from their contributions to the relationship (Homans, 1961). Thus, unequal ratios of prots to investments between all parties involved in an exchange relationship create perceptions of unfairness. Procedural fairness concerns judgments whether processes are based on prevailing norms and behaviors (Thibaut and Walker, 1975). We propose that consumers price fairness perceptions are inuenced by both procedural and distributive considerations. For example, a dealers price offer for an automobile may be accompanied with an explanation of the prices of various options and delivery charges, as well as required down payment and nancing arrangements. In such situations, both the initial price of the car quoted by the sales person (i.e., price offer) and the terms associated with the price and how these terms are handled and explained to the consumer (i.e. price procedure) will inuence consumers fairness perceptions. Also, price offer fairness perceptions and price procedural fairness perceptions are positively correlated. The order of inuence will be determined by the sequence in which consumers receive the price offer and the price procedural information (van den Bos et al., 1997). Another foundation of price fairness perceptions, the principle of dual entitlement, suggests that one party should not benet by causing a loss to another party. When a rm uses higher consumer demand to its own advantage by increasing prices, consumers will feel being exploited and hence perceive the prices as unfair. For example, one study showed that 82 percent of the respondents judged a price increase for snow shovels the morning after a snowstorm to be unfair, while only 21 percent of respondents viewed an increase in grocery prices following an increase in wholesale prices as being unfair (Kahneman et al., 1986). While the dual entitlement principle originated from buyers reactions toward sellers obvious exploitation based on supply and demand changes, it is possible that consumers may develop perceptions of unfairness based on their own demand situations even without explicit exploitation actions from the seller. For example, when buyers feel that they have to buy a product and must bear whatever the price is, they may be concerned that potentially they could be exploited by the seller regardless whether the seller actually performs such actions. Relationship of fairness perceptions to satisfaction Recent research in marketing and psychology has shown that satisfaction is positively correlated with fairness perceptions (Bowman and Narayandas, 2001; Huffman and Cain, 2001; Kim and Mauborgne, 1996; Ord?nez et al., 2000; Smith et al., 1999). Oliver and Swan (1989a, b) found that customers fairness perceptions depended on a suppliers commitment and the quality of the goods and services relative to the price paid. Therefore, we propose that price perceptions inuence

The inuence of price fairness on customer satisfaction Andreas Herrmann, Lan Xia, Kent B. Monroe and Frank Huber

Journal of Product & Brand Management Volume 16 Number 1 2007 49 58

consumers overall satisfaction judgments directly and indirectly through price fairness perceptions. In summary, there are various components of fairness perceptions and satisfaction judgments. The components of fairness perceptions are correlated with each other. And, the components of satisfaction are also correlated with each other. In any specic purchase process, the direction of inuence between the components of price fairness depends on the order in which the information about price and terms of the offer is received by the buyers. Similarly, the direction of inuence between the components of satisfaction depends on the sequence of the purchase process. In addition, specic factors that inuence these constructs such as price fairness perceptions likely vary depending on the specic purchase context. Next, we develop specic testable hypotheses for these relationships within an automobile purchase context.

consumers fairness perceptions for both the initial price offered and the various conditions and terms that are attached to the nal price (i.e. procedure). Effects of price perceptions and price fairness Our interviews showed that car buyers indeed consider price an important factor in their purchase decisions. Specically, consumers tend to consider the relative relationship between price and their expectations about the performance of the product they want to purchase (Voss et al., 1998). Hence, an initial price quote from the seller may be compared with a buyers previous experience or an expectation of an acceptable or fair price for the product. If buyers perceptions of performance or quality of the car exceed their expectations and the car represents good value for money, then their perceptions of the quoted or listed price should be favorable (Voss et al., 1998). Consequently, if buyers perceive that the benets offered by the product relative to the perceived sacrice (i.e. price to be paid) is favorable, then they will be more likely to perceive that the price is fair (Monroe, 2003): H1. Buyers price perceptions positively inuence their perceptions of the fairness of price offers. In our interviews consumers frequently talked about their need for the car such as whether they can wait or they have a very short span of time to get the car. For example, their previous car may have broken down or they had an accident and needed to get a new car quickly. Consumers have some common knowledge that in a market economy prices are subject to variations in supply and demand. When demand increases relative to supply, sellers have an opportunity to raise prices and increase their prots. Therefore, when consumers need to purchase a car quickly and have few or no other options, they may feel more vulnerable due to the fear that the seller will take advantage of this opportunity to quote a higher price than in other situations regardless whether the seller actually takes such an action. The dual entitlement principle implies that such situations do inuence buyers price fairness perceptions, especially when buyers have no other alternatives (Kahneman et al., 1986; Kalapurakal et al., 1991). These initial interviews also revealed that the car buyers indicated they felt some anxiety at the initial stages of the buying process. Regardless of previous purchase experience, they felt some concern that they would not know whether the price would be reasonable for their situation. Hence, we propose that consumers feeling of vulnerability may contribute to their perceptions of price unfairness: H2. As consumers perceived vulnerability due to an urgent need and their immediate demand increases, their perceptions of price offer fairness will decrease, ceteris paribus. In terms of the inuence between the two components of distributive and procedural fairness, we found that when buying an automobile, buyers typically receive an initial price offer from the dealer before they discuss specic options that they want and negotiate the nal price and nancial terms with the seller. The principles of distributive and procedural fairness suggest that price fairness judgments will be based on both the outcome (i.e. price) as well as information related to how the specic outcome was determined (i.e. procedure). Information on outcomes and procedures may interact and the order that the information is received inuences 51

Research context
Buying a car was chosen for the study context for several reasons. First, buying a new car is an important decision for most consumers. Consumers perceived risk and uncertainty are likely to be relatively high. Prior research suggests that, when faced with performance or quality uncertainty, consumers are more likely to use price as a cue in forming performance expectations (Urbany et al., 1997). In addition, relatively high product prices enhance the likelihood that perceived price fairness may be an important issue. Therefore, this context provides us with an opportunity to examine the inuence of price fairness perceptions on satisfaction judgments. Second, an automobile purchase is a complex process, involving price negotiation, interaction with service people, selection of different option packages for the car, signing a purchase contract, as well as the car delivery process. The purchase process usually is made up of a sequence of clearly distinguishable individual episodes typically occurring in a similar order for most auto buyers. These different events provide an opportunity to separate consumers satisfactions with different encounters within the entire purchase transaction procedure. We rst conducted 50 informal interviews with prospective auto buyers as well as staff at several auto dealerships in Germany to understand the automobile purchase process. Based on these interviews, we developed a set of factors that inuence price fairness perceptions as well as specic components within the purchase process that affect satisfaction judgments. Moreover, these interviews also enabled us to specify the direction of inuences among the fairness components and the satisfaction components based on the temporal sequence of the purchase process, leading to the conceptual model (see Figure 1) that was tested empirically.

Hypotheses
In the model, we focus initially on the inuence of consumers perceptions of price and price fairness on their satisfaction judgments. First, we propose that perceptions of the products price have both a direct inuence on satisfaction judgments as well as an indirect inuence through price fairness perceptions. As previous research suggests, people form price fairness perceptions from both the offer and the procedure that lead to the offer. Hence, we consider

The inuence of price fairness on customer satisfaction Andreas Herrmann, Lan Xia, Kent B. Monroe and Frank Huber

Journal of Product & Brand Management Volume 16 Number 1 2007 49 58

Figure 1 The conceptual model

perceptions of price fairness. Hence, for a typical car purchase process in Germany, we hypothesize an inuence from perceived initial price offer fairness to perceived price procedure fairness: H3. Buyers perceptions of price offer fairness will have a positive effect on their perceptions of pricing procedure fairness. We propose that fairness and satisfaction are linked through product or service price. Previous research on satisfaction indicates that equity (e.g. perception of price fairness) has a major inuence on satisfaction judgments. Since Szymanski and Henard (2001) have shown that equity has a dominant effect on satisfaction judgments we propose the direction of inuence to be from price fairness to satisfaction: H4. Buyers perceptions of price offer fairness will have a positive effect on their overall satisfaction with the purchase. H5. Buyers perceptions of pricing procedure fairness will have a positive effect on their overall satisfaction with the purchase. In addition to inuencing satisfaction judgments through fairness perceptions, price perceptions also directly inuence satisfaction judgments (Voss et al., 1998). That is, consumers may also judge the price paid relative to the consistency of the performance of the product or service. When consumers compare their perceived gains or benets of the transaction relative to their perceived monetary sacrice and judge that their sacrice is greater than the benets derived from the products performance, consumers may be dissatised (Spreng et al., 1993): H6. Buyers price perceptions will have a positive effect on their overall satisfaction with the purchase. 52

Effects of different components of satisfaction For a complex purchase situation, the overall judgment of satisfaction consists of various components including both satisfaction with the purchase process and satisfaction with the outcome. The interviews indicated that a major aspect of purchasing an automobile involves interactions with salespeople and other members of the dealers staff. Consumers rely on salespeople for specic information about the car to help them make an assessment. There are also opportunities to interact with individuals who handle the nancial aspects of the purchase. Therefore, interaction with members of the dealers staff will have a direct inuence on customers overall satisfaction judgments. Further, although buyers may have some general ideas about the quality of the car they are purchasing, product conditions upon delivery provide a direct opportunity for buyers to assess the quality of the car that they are actually buying (i.e. satisfaction with the outcome). Hence, satisfaction with the condition of the car upon delivery will have a positive effect on overall satisfaction judgments: H7. Buyers satisfaction with the dealers service will have a positive effect on their overall satisfaction with the purchase. H8. Buyers satisfaction with the condition of the car upon delivery will have a positive effect on their overall satisfaction with the purchase. We propose that satisfaction with one stage of the purchase process will have a positive inuence on the satisfaction with other stages, especially when the purchase process occurs in a sequence. Within the car buying process, the initial information that buyers obtain is usually a price quote. Then they learn more about the pricing procedure. Next, they

The inuence of price fairness on customer satisfaction Andreas Herrmann, Lan Xia, Kent B. Monroe and Frank Huber

Journal of Product & Brand Management Volume 16 Number 1 2007 49 58

may develop some further impressions about the dealer based on their interactions with the dealers service people. Finally, they complete the transaction and obtain the car. This purchase sequence determines the direction of inuence from one component of satisfaction to another. We have hypothesized that perceptions of initial price offer fairness have a positive effect on pricing procedure fairness. Obtaining information on pricing procedures and terms associated with a price quote is part of the interactions between the customers and the dealers employees. Therefore, consistent with the purchase sequence, we propose that: H9. Buyers perceptions of pricing procedure fairness will have a positive effect on their satisfaction with the dealers service. H10. Buyers satisfaction with the dealers service will have a positive effect on their satisfaction with the conditions of the car upon delivery.

Table I Socio-demographic structure of the respondents

NCBS (%) Sample (%) 75.2 24.8 6.1 56.1 29.3 8.5 18.7 81.3 12.2 40.6 21.8 17.9 7.3 7.7 28.1 30.9 9.7 23.6 26.8 41.9 24.0 7.3

Gender Male Female Age < 25 23-49 50-65 > 66 Marital status Single or living alone Married or living together Persons living in house 1 2 3 4 >5 Education level Elementary school Middle school High school College University Residence City Town Village Country

76.3 23.4 5.6 55.8 29.3 7.5 17.8 82.2 12.4 40.2 21.5 18.8 7.1 8.5 28.0 32.5 8.4 22.7 27.0 40.7 24.0 8.3

The study
Pretest To start the actual study, 100 car owners who recently had bought a car from one of the dealerships of each of the ve major German car brands (DaimlerChrysler, BMW, Volkswagen, Ford, Opel/GM) were interviewed by well-trained interviewers and averaged 30 minutes. Based on these interviews we rened our set of measurement items, compiling a list of 27 items to measure the constructs. The pretest also revealed that car buying is a highly involving task for consumers. Overall, the respondents were familiar with the car buying process and had some general knowledge about purchasing a car. Final survey After developing the measures, we obtained a list of customers who recently had bought a car from the dealerships. We contacted 460 customers both via mail and subsequent phone calls to solicit participation. Although no incentives were offered, 246 customers agreed to participate for a completion rate of 53.5 percent. A time was scheduled with each participant and the survey was administered face-to-face at the dealerships. Well-trained interviewers from a market research company administered the survey. To help respondents refresh their memories of their purchase experiences, the interviews followed the purchase sequence uncovered during the initial set of interviews that led to the model in Figure 1. Each session lasted about 30 minutes. The demographic characteristics of the buyers and distribution of the brand/model of cars purchased matched that of the New Car Buyer Study (Table I). Measures As summarized below, the respondents answered questions regarding their purchase experiences using seven-point scales ranging from strongly disagree to strongly agree. To select the nal items for each construct, we used Cronbachs alpha, item-to-total correlations, and exploratory factor analysis. Exploratory factor analysis indicated that the measures loaded on the correct factors and provided initial assessments of the discriminant and convergent validities of the measures. The nal 20 items used are given in Table II and the construct correlation matrix is in Table III. As shown in Table III, 20 of the 21 inter-construct correlations are less than 0.50 and one 53

Note: The demographic structure of the study corresponds with the new car buyer study (NCBS) (German)

is exactly 0.50, providing strong evidence of discriminant validity. Overall, the measures displayed very good convergent and discriminant validities. Perceived vulnerability Buyers are more likely to perceive a price is unfair when they feel vulnerable to possible exploitation by a seller. This vulnerability is more severe when buyers need for the product or service is urgent and they are limited by the availability of other alternatives. Using items from Cook and Emersons (1978) feeling of vulnerability, respondents were asked whether the car was absolutely required, and whether there were other transportation alternatives. Price perceptions We argue that buyers perceptions of a price are based on the relativity of price and the perceived performance or quality of the product as well as their comparisons with their expectations (Monroe, 2003; Voss et al., 1998). When buyers perceive the quality or performance is consistent with the price, their perceptions of the price will be favorable, enhancing a fair price perception. Similarly, when a price offer meets ones expectation, the evaluation is likely to be positive.

The inuence of price fairness on customer satisfaction Andreas Herrmann, Lan Xia, Kent B. Monroe and Frank Huber

Journal of Product & Brand Management Volume 16 Number 1 2007 49 58

Table II Scale items and measurement properties

Scale items by construct

t-value
22.53 24.28 22.12 19.21 19.32 16.24 22.08 15.34 15.23 20.25 9.07 19.21 15.79 14.95 15.16 9.32 14.57 9.01 14.43 12.36

Item reliability 0.53 0.69 0.49

Construct reliability 0.55

Variance extracted 0.80

Alpha 0.80

Price perception The price of the new car is appropriate relative to its performance The price of the new car meets my expectations The price of the new car is good value for money comparing to other cars Buyer vulnerability The car is absolutely required for private or business use It is not possible for me to use other means of transportation Price offer fairness The price of the new car of this dealer is clear understandable) All customers are treated equally by the dealers pricing I think the price of this dealer is based on cost The price of the car is independent of customers needs Pricing procedure fairness The terms of this dealer are fair The procedure of buying the car from the dealer is fair Satisfaction with the dealers service The dealers employees are friendly The dealer offers a lot of accessories I am satised with the information that was provided by the employees I am satised with the dealers commitment Satisfaction with the car upon delivery The car was in perfect condition when it was delivered All option requests were fullled The car is the same as my expectations Satisfaction with the purchase I am satised with the car purchase There is no reason to complain

0.71 0.79 0.64 0.51 0.57 0.45 0.43 0.60 0.30 0.34 0.26 0.57 0.67 0.60 0.54 0.51 0.53 0.50 0.67 0.44 0.56 0.68 0.45

0.86

r 0:71

0.84

0.95

0.79

r 0:85

0.78

0.93

0.78

0.77

0.86

r 0:55

Table III Construct and inter-construct correlations

Price perception Price perception Buyer vulnerability Price offer fairness Price procedure fairness Satisfaction with dealers service Satisfaction with car Satisfaction with purchase 0.57 0.35 0.32 0.44 0.26 0.23 0.40 Buyer vulnerability 0.71 0.23 0.37 0.23 0.24 0.38 Price offer fairness Price procedure fairness Satisfaction with dealers service Satisfaction with car Satisfaction with purchase

0.76 0.14 0.24 0.20 0.46

0.85 0.14 0.20 0.37

0.68 0.12 0.50

0.53 0.34

0.55

Therefore, price perceptions were measured using: the price of the new car is appropriate relative to its performance; the price of the new car meets my expectations; and the car is good value for money comparing to other cars. Perceived price offer fairness Since our research is in the specic context of automobile purchases, we developed our own price offer fairness measures drawing on literature sources related to procedural fairness. We emphasized equality of treatment across buyers (Xia et al., 2004), the degree that buyers understood how the 54

price offer was determined (Kim and Mauborgne, 1996), and the responding buyers perceptions of the relationship between their needs and the price quoted by the dealer (Oliver and Swan, 1989b). The German word gerecht meaning fair and just was used to measure fairness perceptions. Also, research indicates that a cost-based pricing strategy is perceived to be fairer (Kalapurakal et al., 1991). Therefore, perceived price offer fairness was measured using: the price offer of the dealer is understandable; all customers are treated equally by the dealer; the price of this

The inuence of price fairness on customer satisfaction Andreas Herrmann, Lan Xia, Kent B. Monroe and Frank Huber

Journal of Product & Brand Management Volume 16 Number 1 2007 49 58

dealer is based on cost; and the price of the car is not affected by the individual customers needs. Pricing procedure fairness Research on procedural fairness suggests that the procedure of setting the price, in addition to the price itself would inuence buyers fairness perceptions. For a car purchase, a price is a combination of several elements and carries with it various terms and conditions. Therefore, how these terms and the price setting procedures were explained to and accepted by the buyers were measured using two items: the terms of the dealer are fair; and the procedure of buying a car from the deal was fair. Satisfaction with the dealers service The measures used for this construct were based on the various interactions that the buyers had with the dealer including the friendliness of the staff, the impression obtained when purchasing accessories, satisfaction with the information provided by the dealer, and satisfaction with the dealers general commitment (Burmann, 1991; Ostrom and Spreng et al., 1996). Satisfaction with the car upon delivery This aspect of satisfaction was measured by obtaining buyers perceptions of the car relative to their expectations, the condition of the car when it was delivered, and whether all options or features of the car that the buyers requested had been met. Overall satisfaction Two items were used for this construct: overall satisfaction with the purchase and intention to complain. Measurement properties of the scales Using exploratory and conrmatory factor analyses, the measurement model was assessed for the dimensionality of the scales, their reliability and the construct validity of the measures. Item reliability, construct reliability, and variance extracted of the items are shown in Table II. A single-factor conrmatory factor analysis (WLS estimate) was conducted to further check scale reliability and validity. The conrmatory assessment of the measurement properties of all four scales with at least three items indicated that the conrmatory factor loadings (lambdas) were high and signicant (p , 0:001), satisfying the criteria for convergent validity. Moreover, Cronbachs alpha for these four scales was 0.77 or higher, indicating adequate reliability. Except for perceived price offer fairness, all construct reliabilities were greater than 0.50. The variances extracted were greater than 0.75. These two assessments exceed the established minimum criteria (Fornell and Larcker, 1981). All t-values shown in Table II were statistically signicant, providing evidence of convergent validity of the measures (Fornell et al., 1982). The M2 measure developed by Fornell et al. (1982) had a value of 0.46 which is above the required threshold of 0.40. All inter-construct correlations were 0.50 or less, indicating the measures had discriminant validity. The squared correlation coefcients of each latent variable with relevant others was smaller than the average variance recorded in 31 of 42 possible comparisons, providing more evidence of discriminant validity. 55

Evaluating the structural model The structural model (Figure 2) was tested using LISREL 8.3 (Joreskog and Sorbom, 1996). PRELIS was used to generate the input matrix. Analysis was conducted separately for an exogenous model that included the exogenous constructs and their indicators and an (endogenous model that included the endogenous constructs and their indicators). To test the absolute t of each of these two models, the goodness of t index (GFI) was 0.99 (0.98) and the adjusted goodness of t index (AGFI) was 0.98 (0.96). Thus, the goodness of t indices were well above the minimum criterion values of 0.90. For the full model, the root mean square error of approximation (RMSEA) was 0.043 for both models, which is below the recommended upper threshold of 0.08. These indices clearly indicate a good absolute t to the data (Joreskog and Sorbom, 1996). Testing the comparative t of the two models, the normed t index (NFI) (Bentler and Bonett, 1980) was 0.98 (0.97), also exceeding the suggested criterion value of 0.90. The comparative t index (CFI) of 0.99 (0.99) exceeded the criterion value of 0.90 (Bentler, 1990). The incremental t index (IFI) was 0.98 (0.97), again indicating a good t. Alternative model congurations were considered, but as these indices indicate, improvements in t could not be obtained by any alternative congurations. Test of the hypotheses The standardized estimates for the various model paths for the study are shown in Table IV along with the results of the hypotheses tests according to the sequence of paths depicted in Figure 2. As hypothesized, respondents perceptions of price offer fairness were positively inuenced by their price perceptions (b 0:64, t 14:62, p 0:04, supporting H1), and negatively inuenced by their perceived vulnerability (b 20:21, t 4:63, p 0:05, supporting H2). When buyers perceive that the price offer is consistent with or exceeds their expectations about the cars perceived quality or performance, they are more likely to perceive the price offer as fair. Further, an increase in buyers need and demand enhances a feeling of vulnerability, which, ceteris paribus, increased their concern as to whether the price offered by the dealer was fair, producing a negative effect. Thus, our results complement past research results (Kahneman et al., 1986; Maxwell, 1995). Moreover, price perceptions also exerted a small direct inuence on overall satisfaction with the purchase (b 0:15, t 1:95, p 0:09). We also ran the model without the direct effect of price perceptions and compared it with the hypothesized model. The difference was signicant (x2 66:97, p , 0:01) so we kept the path. The combined direct and indirect effect of price perceptions on overall satisfaction with the purchase is 0.48. Thus, these results support our argument that price perceptions have a major inuence on overall customer satisfaction (see also Singh and Sirdeshmukh, 2000; Voss et al., 1998). We hypothesized (H3) that perceived price offer fairness has a positive effect on perceived pricing procedure fairness since car buyers are more likely to obtain an initial price offer before a nal price is negotiated. The initial perceptions of the fairness of the offer are likely to inuence perceptions of price procedure fairness (van den Bos et al., 1997). This relationship was supported (b 0:89, t 17:78, p 0:05). Regarding the relationship between fairness and satisfaction, we hypothesized that perceived price offer

The inuence of price fairness on customer satisfaction Andreas Herrmann, Lan Xia, Kent B. Monroe and Frank Huber

Journal of Product & Brand Management Volume 16 Number 1 2007 49 58

Figure 2 Effects of price fairness on customer satisfaction

Table IV Testing the model (Figure 2) relationships

From Perceived vulnerability Price perceptions Price offer fairness Pricing procedure fairness Satisfaction with dealers service Satisfaction with car Price perceptions Price offer fairness Pricing procedure fairness Satisfaction with dealers service To Price offer fairness Price offer fairness Pricing procedure fairness Satisfaction with dealers service Satisfaction with car Satisfaction with purchase Satisfaction with purchase Satisfaction with purchase Satisfaction with purchase Satisfaction with purchase Sign 2 Standardized relationship estimate 2 0.21 0.64 0.89 0.61 0.44 0.30 0.15 0.22 0.32 0.36

t-value
4.63 14.62 17.78 10.30 12.97 5.02 1.95 2.53 2.56 4.06

p-value
0.05 0.04 0.05 0.06 0.03 0.06 0.09 0.04 0.05 0.09

fairness (H4) and perceived pricing procedure fairness (H5) have positive effects on buyers overall satisfaction judgments. These propositions are supported by a direct effect of price offer fairness (b 0:22, t 2:53, p 0:04) and a direct effect of pricing procedure fairness (b 0:32, t 2:56, p 0:05). The combined effect of price offer fairness perceptions on overall satisfaction judgments, including the direct effect and the indirect effect through price procedure fairness, is 0.77. The results indicated that both satisfaction with the dealers service (b 0:36, t 4:06, p 0:09, H7) and satisfaction with the conditions of the car upon delivery (b 0:30, t 5:02, p 0:06, H8) positively inuence overall satisfaction. Also, buyers perceptions of pricing procedure fairness positively inuenced the respondents satisfaction with the dealers service (b 0:61, t 10:3, p 0:06, H9). 56

Finally, satisfaction with the dealers service had a positive effect on satisfaction with the condition of the car upon delivery (b 0:44, t 12:97, p 0:03, H10). Overall, the results indicate that buyers satisfaction with an automobile purchase is inuenced by their price fairness perceptions as well as their satisfaction with various transactions that occur during their purchase process.

Discussion
Our research contributes to the literature on satisfaction by incorporating the role of perceived price fairness. Price is an important element in consumers purchases; therefore it has a large inuence on consumers satisfaction judgments. The results showed that price perceptions directly inuence satisfaction judgments as well as indirectly through

The inuence of price fairness on customer satisfaction Andreas Herrmann, Lan Xia, Kent B. Monroe and Frank Huber

Journal of Product & Brand Management Volume 16 Number 1 2007 49 58

perceptions of price fairness. Our research has linked these two important concepts and demonstrated the inuence of perceived price fairness on satisfaction judgments empirically. Further, we have extended research relative to the inuence of demand-supply relationships on price fairness perceptions by examining the demand side perceptions (i.e., consumer vulnerability) without actual supply side actions. Results indicate that consumers perceived vulnerability, which is induced by a perceived urgency of need by the consumers, had a negative effect on perceived price offer fairness. The results extend the dual entitlement principle and imply that sellers should not only avoid exploiting their customers but should also anticipate consumers potential feelings of being exploited. Being sensitive to the buyers psychological state and assuring buyers of fair treatment will enhance perceptions of price fairness without changing the price offer. When buyers are relaxed relative to their feelings of vulnerability, price fairness perceptions will be higher, thereby enhancing satisfaction judgments. However, we did not measure respondents prior relationship with the dealerships. Presumably, a good existing relationship with the dealerships may serve as a safety net that consumers may use to reduce their feelings of vulnerability. In addition, the felt vulnerability within our study context may also be due to the respondents high involvement with the purchase. Hence, future research should examine when consumer vulnerability would occur as well as its impact on perceptions of fairness and satisfaction across different levels of prior experience or relationship with the seller. By manipulating vulnerability and prior experience with the seller, we might expect that the effects of vulnerability on price perceptions would be attenuated when the prior relationship with the dealer is satisfactory (Homburg et al., 2005). Conversely, when perceived vulnerability is high and the buyer has no prior experience with the dealer, the negative effects on price perceptions we observed in this study would be more substantial. Results from such future research would offer additional guidelines for sellers to anticipate and handle consumer vulnerability. Second, both the price offer and the procedure used to develop a price are important in inuencing satisfaction judgments. In complex purchases such as an automobile, consumers need to understand the procedure for setting the price and terms and conditions related to a price in order to make a judgment about the price offered. Therefore, explaining this procedure and offering such information to consumers will enhance the transparency of the price and perceived fairness, further positively inuencing satisfaction judgments. This price transparency may be particularly relevant when prices are increased or when the price structure is relatively complex. When a seller explains how a price is derived and shows that price increases are due to uncontrollable external factors such as an increase in raw material prices, the buyer is more likely to accept the price increase and perceive it fair or at least as less unfair (Vaidyanathan and Aggarwal, 2003; Xia et al., 2004). Third, consistent with previous research, we showed that overall judgments of satisfaction are inuenced by consumers satisfaction with various stages in a purchase process. In the context of automobile purchases, overall judgments of satisfaction were determined by satisfaction with the dealers service and satisfaction with the conditions of the product upon delivery in addition to perceptions of price fairness. 57

These elements are correlated but distinct components of overall satisfaction judgments. By partitioning satisfaction into several distinct components, sellers can determine which component inuences satisfaction at the various stages of the purchase process. Hence, a better understanding of consumers satisfaction formation will increase our knowledge of how to enhance consumers satisfaction. This research linking perceived price fairness and customer satisfaction was examined in an automobile purchase context. Nevertheless, we believe the results reported in this article can be generalized to other consumer purchases of relatively highpriced products and complex purchase processes involving multiple interactions with the sellers employees. However, whether and how the relationship between price fairness and customer satisfaction extends to other product and service purchase contexts needs to be examined. Further, as we suggested, the direction of inuence among the components of fairness perceptions and satisfaction judgments depends on the sequence of interactions within the purchase process and the order that consumers receive relevant information. Hence, another area needing additional research is when consumers rst receive information about the pricing procedure as well as the price offer itself.

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About the authors

Andreas Herrmann is Professor of Media and Communications Management at the University of St Gallen, Switzerland. Lan Xia is Assistant Professor, Marketing Department, Bentley College, Waltham, Massachusetts, USA. Lan Xia is the corresponding author and can be contacted at: lxia@bentley.edu Kent B. Monroe is J.M. Jones Distinguished Professor of Marketing Emeritus, University of Illinois, and Distinguished Visiting Scholar, University of Richmond, Glen Allen, Virginia, USA. Frank Huber is Professor of Marketing at the University of Mainz, Germany.

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