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Pricing and Economic Strategies: Odd Pricing
Odd pricing is a psychological pricing strategy that involves ending pricing with an odd number, for example, $9.99 rather than $10, to take advantage of how people react to pricing information. In particular, the odd pricing ending with the nine-digit causes the consumer to perceive the leftmost digit as more palatable in magnitude as in the example above with the first 9. Odd pricing is widely used, especially in the retail industry, and makes economic sense since marketers and retailers agree that it helps companies increase their revenues (Zou & Petrick, 2020, p. 1654).
The Ethics of Odd Pricing, Price Discrimination, Cost-Plus Pricing, and Two-Part Tariffs
Jackson (2022) states that there should be value to both buyers and sellers at a fair price, and organizations setting prices that only befit the firm and harm consumers is unethical practice (p. 1). Jackson (2022) asserted that ethical pricing practices should align with fair business practices (p. 3). To ensure fair business practice, pricing strategies should be monitored and overseen. Odd pricing is ethical as long as the odd price is close to the market equilibrium price (Jackson, 2022, p. 3). Price discrimination is ethical so long as the price tiers are related to how much each group of consumers is willing to pay (Jackson, 2022, p. 5). For example, it benefits society when seniors are offered reduced movie and airline ticket prices because of their limited income. This author is familiar with cost-plus pricing from their work because their customers are charged cost-plus prices on their merchant services statements. Cost-plus pricing means the merchant services customers pay the network fees charged by the card brands, say Visa and Mastercard, and then processing fees are identified separately from the costs. Unethical practice regarding cost-plus pricing is when the costs are marked up but the markup is not disclosed or described to the customer.
A two-part tariff is a pricing strategy involving a phenomenon where a product is sold in units, and the consumer has to pay a fixed fee to be able to purchase the product. If the fixed fee required to be paid to purchase a good is high, then only high-worth consumers will buy, and when the fixed fee is low, both high-worth and other consumers can buy the product (Chen, 2022, p. 117). Two-part pricing is ethical when it helps address the consumer moral hazard. The consumer moral hazard is a phenomenon where a party takes risks because they do not bear full responsibility for the outcomes. For example, a retailer’s managers overclaim markdowns with the manufacturer to boost the retailer’s profit margins (Cai et al., 2021, p. 868). Another example is customers’ membership fees to purchase discounted items and Sam’s Club and Costco.
References
Cai, Y. J., Choi, T. M., & Zhang, J. (2021). Platform supported supply chain operations in the blockchain era: Supply contracting and moral hazards. Decision Sciences, 52(4), 866–892. https://doi.org/10.1111/deci.12475
Chen, F. (2022). A graphical exposition of the profit maximizing two-part tariff. The American Economist, 67(1), 116–122. https://doi.org/10.1177/05694345211019721
Jackson, W. A. (2022). The ethics of price variation. Forum for Social Economics. Advance online publication. https://doi.org/10.1080/07360932.2022.2080753
Zou, S., & Petrick, J. F. (2021). Left-digit effect in tourists’ price evaluations: The moderating role of price level and composite price. Journal of Travel Research, 60(8), 1654–1666. https://doi.org/10.1177/0047287520957418
