Do Consumer Fairness Concerns Soften Price Competition? The Role of Declining Costs

Firms enjoy declining cost per unit of output with increasing cumulative output in a variety of industries, which gives rise to consumer concerns about transaction fairness. Consumers are less likely to purchase from a firm if it continues to reap an unfairly high profit margin. Intuitively, such consumer fairness concerns will induce firms to lower their prices. We develop an analytical framework to show, however, that firms may set higher prices with increasing consumer fairness concerns in the presence of competition. The indirect effect that consumer fairness concerns soften price competition caused by cost reductions dominates the direct effect that they intensify price competition caused by product substitution, when the cost-declining impact is sufficiently strong. Moreover, whether consumer fairness concerns increase or decrease social welfare also depends on the strength of the cost-declining effect. We also show the robustness of our main results by extending our model to a channel setting with quantity-discount contracts.