First vs. Third Degree Price Discrimination in the Labratory

Abstract

Differential pricing is a contentious issue within the business environment. The public’s reaction to price discrimination varies widely from discontent to indifference. I hypothesize that buyers who do not benefit from price discrimination will perceive that it is unfair and reject discriminatory offers from sellers. Using a laboratory experiment, I use differing degrees of price discrimination to test the validity of this prediction. I represent buyer and seller interactions with a modified version of the ultimatum game to model consumers’ perception of fairness. I find that the treatment effect is not significant in determining how buyers will behave. In addition, sellers price higher in third degree situations that in first degree situations. My results indicate that consumers are unlikely to change their behavior in the face of price discrimination even when sellers price aggressively.