Concern for fair prices in the Israeli housing market

Concern for fair prices in the Israelihousing market

Andrew Schein *

Netanya Academic College, 16 Kibbutz-Galuyot Street, Netanya 42365, Israel

Bar-Ilan University, Ramat Gan 52900, Israel

Received 1 February 2001; received in revised form 28 June 2001; accepted 19 November 2001

Abstract

The results from 487 questionnaires of the reactions of consumers and sellers to price

changes in the Israeli housing market show that the concern for fair prices exists by the pur-

chase of homes. The survey results also show that consumers view price increases due to in-

creases in costs as unfair if their only knowledge of the change in costs is from the seller. A

classification of consumers’ reactions to price increases is developed based on the rationales

for the price increases. In addition, the survey results demonstrate that sometimes sellers con-

sider the price that they receive as unfair. � 2002 Elsevier Science B.V. All rights reserved.

PsycINFO classification: 3920

JEL classification: A13; D10; D63

Keywords: Fairness; Consumer behavior; Prices

1. Introduction

Kahneman, Knetsch, and Thaler (1986a, 1986b) have demonstrated that consum-ers believe that some prices in the marketplace are considered unfair. For example, ina survey of 107 Canadians, 82% of respondents considered it unfair for a hardwarestore to raise the prices of snow shovels after a large snowstorm. In addition, theyargued that consumers might leave firms that have a reputation for being ‘‘unfair.’’

Journal of Economic Psychology 23 (2002) 213–230

www.elsevier.com/locate/joep

* Tel.: +972-8-972-9264; fax: +972-2-561-0196.

E-mail address: [email protected] (A. Schein).

0167-4870/02/$ - see front matter � 2002 Elsevier Science B.V. All rights reserved.

PII: S0167-4870 (02 )00064-8

They found that 58% of respondents said they would switch their patronage to a drug-store five minutes further away if the one closer to them raised its prices when a com-petitor was temporarily forced to close. Both of these results have been confirmed insubsequent surveys, Gorman and Kehr (1992), Frey and Pommerehne (1993), Pironand Fernandez (1995), Seligman and Schwartz (1997) and Campbell (1999).

The concern for fair prices is important both from practical and theoretical per-spectives. From a practical point of view, if consumers have a concern for fair prices,then firms have to take this into account when setting their prices, and this implica-tion has been incorporated into the pricing literature (Kaufmann, Ortmeyer, &Smith, 1991). From a theoretical perspective, modern economic models ignore thequestion of fairness, as it is assumed that this concern is not sufficiently relevantto influence the firm’s goal of profit maximization. Yet, this assumption is costlysince it reduces the explanatory value of the models. For example, one of the prob-lems in macroeconomics is the existence of ‘‘sticky prices,’’ which does not accordwith the flexible prices of standard neoclassical price theory. A recent survey (Blin-der, Canetti, Lebow, & Rudd, 1998) of price stickiness, found that a primary reasonfor price stickiness is that firms do not change prices due to a reluctance to ‘‘antag-onize’’ customers. Blinder et al. (p. 309) suggest that, ‘‘Executives who say that fre-quent price adjustments would ‘antagonize’ their customers may be telling us thatbuyers deem it ‘unfair’ if prices rise too frequently.’’

Kahneman et al. (1986a, 1986b) argued that there were twomain principles that de-termined consumers’ sense of fairness in the market. First, they claimed that consum-ers have a reference price that is used for comparison with the market price. If themarket price is more than the reference price, then consumers will view the marketprice as being unfair. Yet, not all price increases are viewed as unfair, as Kahnemanet al. provided evidence that price increases due to higher costs are considered fair.This notion dates at least to the Middle Ages (Langholm, 1998) and was confirmedby Kachelmeier, Limberg, and Schadewald (1991). Konow (1996) refined this ideaby proposing that only exogenous costs can be passed on to the consumer but not dis-cretionary costs, and provided survey evidence for this distinction. However, all thesurvey results are problematic since in ‘‘the real world’’ consumers do not know afirm’s true costs. In all of the surveys, the respondents were told as a fact that the firms’costs increased, and then the majority of respondents thought it was acceptable for thefirms to raise their prices. However, the question remains whether consumers wouldalso consider a price increase due to higher costs acceptable if their only knowledgeof the increase in costs was from the seller and could not be independently confirmed.

Kahneman et al.’s second principle is the theory of dual entitlement that (1986a,p. 734) ‘‘the rules of fairness permit a firm not to share in the losses that it imposes onits transactors, without imposing on it an unequivocal duty to share in gains withthem.’’ This means that while a firm is entitled to protect its profit by increasingits prices in response to higher costs, the firm does not have to lower its prices whenits costs fall. However, Dickson and Kalapurakal (1994), in questionnaires of exec-utives who trade in bulk electricity, found that cost-based rules elicited higher ratingsof fairness than the dual entitlement theory. Accordingly, there is a need for furthertesting of the dual entitlement theory.

214 A. Schein / Journal of Economic Psychology 23 (2002) 213–230

Kahneman et al. (1986a, 1986b) also claimed that the concern for fairness doesnot exist by all goods. They (1986a, p. 736) questioned, ‘‘Why is it fair to sell a paint-ing or a house at the market clearing price, but not an apple, dinner reservations, jobor football game ticket?’’ The supposition of this question was not tested and seemsto be based on their own a priori beliefs that the concern for fairness does not existby goods that are assets and can be resold. Kristensen (2000) found that the concernfor fairness is relevant to corporate takeovers, but suggests that this is because thecompanies might interact in the future. Thus, the question remains whether the con-cern for fairness exists by assets where the participants will not interact in the future.

This paper aims to further elucidate the reasons why some prices are concernedunfair through a survey of the Israeli housing market. The survey tests whetherthe concern for fairness exists by the purchase of homes, the dual entitlement theory,and whether consumers consider price increases due to higher costs fair when theironly knowledge of the higher costs is from the seller and cannot be independentlyconfirmed. The survey results also enable a hierarchy of consumer responses to priceincreases to be developed. In addition, the literature that has developed about fairprices has focused on the buyer’s perspective of fairness, and here we will also studywhether sellers also consider some prices to be unfair.

The paper is divided into two studies. The first study examines the question of fairprices from the buyer’s perspective and comprises Section 2.1 through 2.3. The sec-ond study examines the question of fair prices from the seller’s perspective and com-prises Sections 3.1 and 3.2. Section 4 concludes the paper.

2. Study 1 – Buyer’s concern for fairness

2.1. Methodology of the survey from the buyer’s perspective

The survey examined the responses of buyers to price changes in the Israeli hous-ing market. This market has several unique features, which need to be clarified. First,due to the history of inflation in Israel, the prices in the housing market, both withregard to rentals and sales, are usually set in dollars but the actual transaction is withshekels, the domestic currency, based on the representative exchange rate publisheddaily by the Bank of Israel. This anomaly can cause changes in the dollar value of ahouse and the cost in shekels of the house based on changes in the foreign currencymarket independent of the domestic housing market. At the time of the survey theexchange rate was approximately four shekels to the dollar, and this was the baserate used in the survey. A second uniqueness to the Israeli housing market is thatthe term ‘‘house’’ in Modern Hebrew is a general word for all types of living quar-ters, whether apartments or detached homes. The survey questions did not specifywhether the house was an apartment or a detached home, but the initial price ofthe house ($ 200,000 or 800,000 shekels) or the rental ($ 500 or 2000 shekels) wouldgenerally be associated with an apartment in a middle class area. A third uniquenessof the Israeli housing market is that many houses are bought from building contrac-tors ‘‘on paper’’ in the middle of the building process. This allows cost changes to be

A. Schein / Journal of Economic Psychology 23 (2002) 213–230 215

relevant to the sale price, and thus the survey questions concerning buying a housewas where the house was in the middle of the building process and was being boughtfrom a contractor.

The survey consisted of four question sets. The question sets were divided intotwo categories depending on whether the transaction was a sale or a rental, and with-in each of these two possibilities there was a further division whether the price of thehouse was in dollars or shekels.

The respondents consisted primarily of students and administrative workers ofthe Netanya Academic College in Netanya, Israel. In addition, some respondentswere students at Bar Ilan University and Boston University’s management programin Israel. The survey was done in fall 2000. Each respondent answered only one set ofquestions and altogether there were 261 responses to the four sets of questions fromthe buyer’s perspectives.

For each set of questions, the respondent was asked to fill out a written question-naire based on the following information. If the questions related to buying, thenthe respondent was informed that he/she had been searching to buy a house and fi-nally he/she had found a house either at a price of $200,000 or 800,000 shekels. Ifthe questions related to renting, then the respondent was similarly informed that he/she had been searching to rent a house, and finally he/she had found a house at ei-ther a price of $500 a month or 2000 shekels a month. These prices were then thereference prices for each respondent. The respondent was also told that he/she likedthe house so much that really they would be willing to pay 20% more than the statedprice. Afterwards in each set of questions, six scenarios were described where ineach scenario the price rose by 20% but a different rationale was given for each priceincrease. The respondent was first asked to state whether he/she thought the priceincrease was fair, acceptable, not so fair, or unfair. Afterwards, the respondentswere asked to state whether the new price would stop them from continuingwith the transaction. One set of the actual survey questions is included in theAppendix.

The following are the six scenarios: the first scenario was where the price increasedby 20% with no reason being provided for the price increase. The second scenariowas where the price increased by 20% due to disadvantageous changes in the foreignexchange market from the seller’s perspective. If the house was priced in dollars, thenthe price increase was due to a 20% appreciation of the shekel and if the house waspriced in shekels, then the price increase was due to a 20% depreciation of the shekel.The third scenario was where the price increased by 20%, but either the contractor orthe landlord claimed this was due to a 20% increase in the costs of either building ormaintaining the house. The fourth scenario was where the price increased by 20%because the contractor or landlord claimed that many people had expressed interestin the house. The fifth scenario was where the price increased by 20% because thecontractor or landlord had learned that the buyer had a specific reason for desiringthe house. The sixth scenario was where the price remained constant, but due tochanges in the foreign exchange market, the contractor or landlord’s profits couldbe viewed as increasing by 20%. If the price was in dollars, then a 20% depreciationof the shekel would cause the contractor or landlord to receive 20% more shekels,


and if the price was in shekels, then a 20% appreciation of the shekel would increasethe dollar value of the sale or rental by 20%.

When classifying the results the categories of answers were coded to allow statis-tical tests. A respondent’s reaction was coded as 1 if he/she thought the price increasewas fair, 2 if he/she thought the price increase was acceptable, 3 if he/she thought theprice increase was not so fair and 4 if he/she thought the price increase was unfair.

2.2. Results of the survey from the buyer’s perspective

2.2.1. Concern for fair prices by the purchase of housesThe results of the survey are presented in Table 1. The survey results for scenario

1 demonstrate that respondents overwhelmingly considered a price increase unfairwhen no reason was provided for the price increase. With regard to all four questionsets of either buying or renting a house, between 93% and 95% of the respondentsthought the price increase was either unfair or not so fair. These results confirm thatthe concern for fair prices is a universal belief.

The results by the two question sets regarding buying a house also demonstratethat the concern for fairness exists by the purchase of homes. Thus, the concernfor fairness exists by the purchase of assets even when there is no likely future inter-action between the buyers and sellers, since by the purchase of a home there is a lowprobability that the participants will interact in the future.

2.2.2. The dual entitlement theoryScenarios 2 and 6, the questions relating to changes in the exchange rate, are a test

of the dual entitlement theory. The dual entitlement theory by exchange rate changeswould be that it is acceptable for a firm to raise its prices in response to changes inthe exchange rate that are disadvantageous to the firm, but it is not required to lowerits prices due to changes in the exchange rate that are favorable to the firm. In thesecond scenario the price increased in response to a change in the exchange rate thatwas disadvantageous to the seller, and the sixth scenario was where the seller main-tained the price even though the exchange rate changed in his favor.

The survey results verify the dual entitlement theory in three out of the four ques-tion sets. The survey results from Scenario 2 show that for each question set a ma-jority of respondents thought it was either fair or acceptable for the price to rise inresponse to a disadvantageous change in the exchange rate. This accords with thedual entitlement theory that price increases are acceptable to protect a firm from los-ing money. Yet, the key question is whether the same consumers believe it is accept-able for a firm to maintain its price when the firm gains from changes in the exchangerate. The survey results from Scenario 6 show that for three of the four question sets,the exception being buying an house that is priced in dollars, a majority of respon-dents thought it was fair or acceptable for the seller to maintain his price eventhough there was a favorable change in the exchange rate from his perspective.

While the results from the survey support the dual entitlement theory, they alsoshow that the theory is not universally accepted. First, there was one question setwhere a majority of respondents believed that the seller should lower his price when


the exchange rate changed in favor of the seller. Second, in the question set of rentinga house priced in dollars, a substantial minority of respondents (45%) thought it was

Table 1

Buyer’s reactions to price increases

Buying a house that is priced in Renting a house that is priced in

Dollars Shekels Dollars Shekels

Scenario 1: No reason provided for price increase

F 3 1 0 0

A 3 5 5 7

NF 35 23 33 17

U 58 72 62 76

(N ) 60 88 55 58

Scenario 2: Price increase in response to a disadvantageous change from the seller’s perspective

F 20 15 15 22

A 45 44 44 55

NF 22 35 40 17

U 13 6 2 5

(N) 60 88 55 58

Scenario 3: Seller claims costs increased

F 17 2 4 7

A 22 20 23 30

NF 34 43 36 43

U 27 34 36 20

(N) 59 88 53 56

Scenario 4: Increased interest in house

F 8 7 6 4

A 19 17 15 28

NF 24 25 21 23

U 49 51 58 46

(N) 59 88 53 57

Scenario 5: Seller learns that buyer has a specific reason for desiring house

F 2 0 4 2

A 3 2 6 7

NF 12 10 17 11

U 83 88 74 81

(N) 59 88 53 57

Scenario 6: Seller maintains price when there is an advantageous change in the exchange rate from the

seller’s perspective

F 19 32 25 40

A 24 39 31 36

NF 38 17 33 20

U 17 11 12 4

(N) 58 87 52 50

F is the percentage of respondents who thought the price increase was fair, A is the percentage of

respondents who thought the price increase was acceptable, NF is the percentage of respondents who

thought the price increase was not so fair and U is the percentage of respondents who thought the price

increase was unfair.


either not so fair or unfair for the seller to maintain his price. It should be noted thateven in Kahneman et al.’s (1986a, 1986b) studies the evidence for the dual entitle-ment theory was not overwhelming. For example, they found that when a firm’scosts fell, 47% of the respondents thought the firm should have to lower its price,which means that these respondents were rejecting the dual entitlement theory. Thus,the dual entitlement theory seems to explain a majority of consumers’ beliefs con-cerning fair prices, but a significant minority of consumers does not accept thetheory.

2.2.3. Cost rationale for price increasesAs discussed above, previous survey results show that consumers consider it ac-

ceptable for firms to raise their prices due to higher costs when consumers know thatthere was indeed an increase in costs. This finding corresponds to the results fromScenario 2, that a majority of respondents considered it fair or acceptable for a firmto increase its price due to disadvantageous changes in the exchange rate. The surveyquestion of Scenario 3 was to test whether consumers also consider a price increasedue to higher costs acceptable if their only knowledge of the higher costs is from theseller and could not be independently confirmed. In Scenario 3, the respondent wastold that the seller claimed that his costs increased by 20% and therefore raised hisprice by 20%. The survey results show that consumers did not consider the price in-crease fair, as in all four question sets a majority of respondents thought the priceincrease was either not so fair or unfair. The survey results imply that consumersdo not always believe sellers when they claim their costs increase.

2.2.4. Reaction to price increases due to demand changesThe survey examined consumers’ responses to demand changes in Scenarios 4 and

5. The fourth scenario was where the seller told the buyer that the price increasedbecause many people had expressed interest in the house. This corresponds to a priceincrease due to a general increase in demand and consumers thought these price in-creases were unfair. As indicated in Table 1, for each of the four questions sets ofScenario 4 at least 69% of respondents thought the price increase was either unfairor not so fair.

The fifth scenario was where the seller increased the price because he knew thepotential buyer had a specific reason for wanting the house. This would be a priceincrease due to an increase in an individual’s personal demand, and this was over-whelmingly considered unfair. As indicated in Table 1, for each question set of Sce-nario 5 at least 91% of the respondents thought the price increases was either unfairor not so fair. This result accords with question 14 in Kahneman et al. (1986a). Theyfound that 91% of respondents thought it was unfair for a landlord to raise the rentafter the landlord learned that the tenant had taken a job very close to the house andwas unlikely to move.

2.2.5. Consumer resistance to unfair pricesAs mentioned above, Kahneman et al. (1986a, 1986b) argued that consumers

might change their purchases if a store is considered ‘‘unfair.’’ This behavior was


tested in the present survey by the second question in each scenario: would the newprice stop the respondent from continuing with the transaction? Since the respondenthad been told that he/she liked the house so much that they were willing to pay 20%more than the initial price, a person who would not continue with the transactionwould be acting out of principle against the price increase. The test was whether re-spondents who considered the price increase unfair were more likely to stop fromcontinuing with the transaction than respondents who just considered the price in-crease not so fair. The test was done by combining the answers from these two typesof respondents for all six scenarios for each of the four question sets. The respon-dents’ reactions were coded as 1 if they would stop the transaction, 2 if they wouldnot stop the transaction and 3 if they did not know. The mean reaction of respon-dents who thought the price increase was unfair was 1.8 (variance ¼ 0:75, N ¼615) which was significantly lower than 2.13 the mean reaction of respondentswho thought the price increase was not so fair (variance ¼ 0:62, N ¼ 395). Thisshows that relatively, the more a consumer considers a price to be unfair the morelikely it is that the consumer will act based on principles and not transact with an‘‘unfair’’ seller. This result accords with Walster, Walster, and Berscheid (1978) thirdand fourth basic propositions of equity theory.

2.3. General discussion of the survey results from the buyer’s perspective

After reviewing the survey results from each scenario, we are now able to comparethese results. We can develop a hierarchy of consumer reactions to price increasesand we can examine whether consumers have different reaction to buying as opposedto renting.

2.3.1. Hierarchy of consumer reactions to price increasesWe have seen that price increases in Scenarios 1, 3–5 are considered unfair by a

majority of respondents, but some price increases are considered relatively moreunfair than others. These relative differences can be tested by a matched pair t-test.The matched pairs are a comparison of each respondent’s responses to two differentscenarios. The null hypothesis is that respondents considered all price increases at thesame level of fairness or unfairness. If the t-statistic is significant than significantlymore respondents considered a price increase to be unfair based on the particularreason for the price increase. The results from the t-tests are presented in Table 2.

The first matched pair is when a price increase was for no reason (Scenario 1) asopposed to when a price increase was because the seller claimed his costs increased(Scenario 3). The survey results show that consumers thought a price increase wasrelatively more unfair when the seller provided no reason for the price increase thanwhen he claimed his costs increased. The t-statistics of column 2 of Table 2 are allsignificant at a 1% level for each of the four question sets.

The next matched pair of Table 2 is a price increase due to a general increase indemand (Scenario 4) as opposed to a price increase when a seller claims his costs in-creased (Scenario 3). Kahneman et al. (1986a, 1986b) found that price increases due


to demand changes are more likely to be considered unfair than when due to costincreases. The t-statistics in column 3 of Table 2 show that this distinction remainseven when the buyer’s only knowledge of the increase in costs is from the seller. Ofthe four t-statistics, one t-statistic is significant at a 1% level and two t-statistics aresignificant at a 5% level. The results from the first two matched pair tests suggest thatwhile many consumers do not believe the seller’s claim of increased costs, still someconsumers accept the seller’s claim.

The third matched pair tested was the different responses of consumers to pricechanges when no reason is provided (Scenario 1) as opposed to when the reason isa general increase in demand (Scenario 4). The t-statistics in column 4 of Table 2are significant either at a 1% or 5% level, which shows that consumers view price in-creases as being relatively more unfair when no reason is provided than when theprice increases are due to a general increase in demand.

The fourth matched pair tested was the different responses to price increases dueto an increase in a person’s specific or individual demand (Scenario 5) as opposed towhen the increase was due to a general increase in demand (Scenario 4). Three of thet-statistics (column 5 of Table 2) are significant at the 1% level and the fourth t-sta-tistic is significant at the 10% level. This shows that consumers consider a price in-crease due to an increase an individual’s demand to be relatively more unfair thanwhen the price increase is due to a general increase in demand.

The fifth matched pair tested was the different responses to a price increase due toan increase in an individual’s specific demand (Scenario 5) as opposed to a price in-crease where no reason is provided (Scenario 1). Two of the t-statistics of this test

Table 2

t-statistics for test of consumer reactions to rationales for price increases

Question sets Matched pairs

No reason vs.

claimed cost

increase

General

demand vs.

claimed cost

change

No reason

vs. general

demand

Specific

demand vs.

general

demand

Specific

demand vs.

no reason

Buying a house that is

priced in dollars

(N ¼ 59)

5.03� 2.5� 2.27�� 5.56� 2.62�

Buying a house that is

priced in shekels

(N ¼ 88)

6.1� 0.96 3.19� 6.78� 2.75�

Renting a house that is

priced in dollars

(N ¼ 53)

3.76� 2.16�� 1.94�� 1.58�� 0.36

Renting a house that is

priced in shekels

(N ¼ 56)

7.18� 2.16�� 4.21� 5.27� 0.19

The t-statistics are from matched pair t-tests.� Indicates that the t-statistic is significant at a 1% level.�� Indicates the t-statistic is significant at a 5% level.�� Indicates the t-statistic is significant at a 10% level.


(column 6 of Table 2) are significant at a 1% level and two t-statistics are not signif-icant. The evidence here is less conclusive than in the other cases, but still the factthat two t-statistics were highly significant allows one to tentatively state that con-sumers consider a price increase relatively more unfair when it is due to an increasesin an individual’s specific demand than when no reason is provided for the priceincrease.

The results of the five matched pair tests enable one to classify the reactions ofconsumers to price increases based on the rationales for the price increases. The mostlikely situation where a consumer will consider a price increase as unfair is when aprice increase is because a seller knows that the buyer has a specific reason for desir-ing the good. The probability that a consumer will consider a price increase as unfairdecreases just slightly when no reason is provided for the price increase. When aprice increase is due to a general increase in demand, the probability that a consumerwill consider the increase as unfair, while still substantial, is less than when no ratio-nale is provided for the price increase. This probability will further decrease when theseller claims the price increase was due to an increase in his costs.

2.3.2. Buying vs. rentingAs mentioned above, the survey results show that the concern for fairness exists

even when buying an asset. Yet, is there a difference in the relative concern for fair-ness when buying an asset as opposed to purchasing a consumption good? This ques-tion can be examined by a comparison of the survey responses by buying a house asopposed to renting a house. For each of the scenarios, did the respondents considerthe price increase relatively more unfair by renting as opposed to buying?

This question was tested by dividing the question sets into two groups dependingon whether the house was priced in dollars or shekels, and then within each group,comparing the responses of consumers whether they were buying or renting for eachof the six scenarios. The null hypothesis is that the level of fairness or unfairnesswould be equivalent whether buying or renting. If the test statistic is positive, thenthe respondents considered price increases by renting relatively more unfair thanby buying and if the test statistic was negative then the respondents considered priceincreases by buying more unfair than by renting. Altogether there were twelve cases,but in only three cases were the test statistics significant (results not presented here).Furthermore, of the three significant test statistics, two were negative and one waspositive. These inconsistent results imply that the survey results do not enable oneto distinguish the concern for fairness between buying and renting.

3. Study 2 – Seller’s concern for fairness

3.1. Methodology of the survey from the seller’s perspective

All of the surveys since Kahneman et al.’s (1986a, 1986b) initial studies have fo-cused on the buyer’s sense of unfairness yet a seller might also consider that the price


received is unfair. Just as Kahneman et al. argued that buyers compare the price inthe market to a reference price to determine if a price is considered fair, sellers canalso compare the price they receive to some reference price to determine if the price isfair. Chernow (1998) documents a case of this behavior by sellers. In 1872, JohnRockefeller bought 22 Cleveland oil refiners. Chernow notes that the owners of theserefiners bitterly resented Rockefeller, and in one case, the owners accepted $45,000for their refinery even though they believed it was worth $75,000. Accordingly,$75,000 was the reference price for the owners of the refinery, and as they receivedless than their reference price they considered the price unfair.

The possibility that a seller would believe that a price was unfair was tested in aseparate survey of the Israeli housing market. The survey was a written question-naire that followed the identical categories used in reference to the buyer. Againthere were four question sets, as the respondent was told that he/she had been try-ing to either sell or rent out a house, which was priced in either dollars or shekels.The price of the house was $200,000 or 800,000 shekels and the rental was $500 amonth or 2000 shekels. The respondent was told that these prices were based on amarket appraiser’s estimation of the value of the house, and that they were willingto take 20% less than the market appraisal. The respondents were also told that apotential buyer/renter had expressed interest in the house, but during negotiationsconcerning the house, the potential buyer/renter lowered his offer price by 20%.This lower offer was again based on six scenarios and the respondent was askedto state whether the lower price offer was fair, acceptable, not so fair or unfair.Furthermore, after each scenario, as a follow up question, the respondent wasasked whether the lower offer would stop him/her from selling or renting out thehouse.

The six scenarios were parallel to the scenarios in the survey from the buyer’s per-spective. The first scenario was when the potential buyer/renter lowered his offerprice by 20% without supplying a reason. The second scenario was when the offerprice was changed due to disadvantageous change in the exchange rate from thebuyer’s perspective. If the house was priced in dollars, then this would be by a depre-ciation of the shekel, and if the house was priced in shekels, then this would be anappreciation of the shekel. The third scenario was where the potential buyer/renterlowered his offer price by 20% since he had lost the equivalent sum of money on ahouse he sold or rented out. The fourth scenario was where the offer price was low-ered since the potential buyer/renter knew there was little interest in the house. Thefifth scenario was where the potential buyer/renter lowered his offer since he knewthe seller was under pressure to sell or rent. The sixth scenario was where the offerwas maintained but changes in the exchange rate had benefited the potentialbuyer/renter. If the house was priced in dollars, then there had been an appreciationof the shekel, and if the house was priced in shekels, then there had been a depreci-ation of the shekel.

The survey from the seller’s perspective was conducted in spring 2001 and in totalthere were 226 respondents. The respondents were students from either Netanya Ac-ademic College or Bar Ilan University in Israel. The respondents in this survey didnot participate in the survey from the buyer’s perspective. Again, their responses


were coded as 1 if the respondent thought the price increase was fair, 2 if he/shethought the price increase was acceptable, 3 if he/she thought the price increasewas not so fair and 4 if he/she thought the price increase was unfair. Also, their re-sponses to the follow up question of whether the lower price offer would stop themfrom selling or renting out the house were coded as 1 if the answer was yes, 2 if theanswer was no, and 3 if the respondent did not know.

3.2. Results of the survey from the seller’s perspective

3.2.1. Concern for fairness exists by a sellerThe results of the survey are presented in Table 3 and show that there are some

cases, albeit a minority, where a majority of respondents thought the lower price of-fer was unfair. In Scenario 1, where no reason was provided for the low offer, byboth questions sets concerning selling a house, a majority of respondents consideredthe lower price to be either unfair or not so fair. For Scenarios 2, 4 and 6, there wasno question set where a majority of respondents thought the lower price offer waseither unfair or not so fair. In Scenario 3, for all the question sets a majority of re-spondents (at least 62%) thought the lower price offer was either unfair or not so fair.In Scenario 5, for one question set, selling a house that is priced in dollars, a majorityof respondents thought the lower price offer was either unfair or not so fair. Thus intotal there are seven cases in Table 3 where a majority of respondents considered thelower price offer to be either unfair or not so fair. While certainly these cases are aminority overall, still just from these cases we see that in some circumstances a sellercan consider a price to be unfair.

In addition, the survey results show that sellers will resist from transactingwith buyers that offer unfair offers. Following the same test used by the survey re-sults from the buyer’s perspective (Section 2.2.5), the responses to the follow upquestion, would the lower price offer stop you from selling or renting out thehouse, were combined for all the respondents who thought the lower price offerwas either unfair or not so fair. The t-test showed that significantly more respon-dents who thought the lower price offer was unfair would stop from selling or rentingthe house (mean ¼ 1:66, variance ¼ 0:658, N ¼ 194) than the respondents whothought the lower price offer was just not so fair (mean ¼ 2:13, variance ¼ 0:642,N ¼ 372).

The most consistent finding of sellers’ concern for fairness is the results fromScenario 3 where in all four question sets a substantial majority of respondentsthought the lower offer was either unfair or not so fair when it was to counterbal-ance the buyer for losses he had incurred elsewhere. In discussion with respon-dents after they had completed the survey, the author was told that it wasunacceptable for the potential buyer to transfer his losses onto the seller. Kahnemanet al. (1986a, p. 731) noted that, ‘‘The cardinal rule of fair behavior is surely that oneperson should not achieve a gain by simply imposing an equivalent loss on another.’’Yet, the tricky question is what actions are considered as imposing a loss upon an-other person? A possible answer from the seller’s perspective is that a lower price


offer is considered fair or acceptable when the seller’s loss is not considered a conse-quence of the actions of the buyer since then the buyer is not imposing a loss upon

Table 3

Seller’s reactions to lower price offers

Selling a house that is priced in Renting out a house that is priced in

Dollars Shekels Dollars Shekels

Scenario 1: No reason provided for price increase

F 14 11 19 22

A 32 32 38 42

NF 40 42 33 27

U 14 15 11 9

(N ) 63 53 53 55

Scenario 2: Lower price offer in response to a disadvantageous change in the exchange rate from the buyer’s

perspective

F 21 25 28 22

A 56 43 57 56

NF 16 25 15 20

U 8 8 0 2

(N ) 63 53 53 55

Scenario 3: Buyer claims that lost money

F 2 10 9 4

A 11 17 28 33

NF 27 21 30 28

U 60 52 32 35

(N ) 62 52 53 54

Scenario 4: Decreased interest in house

F 21 17 25 25

A 48 42 47 47

NF 21 37 28 25

U 10 4 0 2

(N ) 62 52 53 55

Scenario 5: Buyer learns that seller is under pressure to sell/rent

F 8 17 26 29

A 31 35 32 38

NF 39 31 28 24

U 23 17 13 9

(N ) 62 52 53 55

Scenario 6: Buyer maintains offer price when there is an advantageous change in the exchange rate from the

buyer’s perspective

F 28 25 19 29

A 31 52 32 47

NF 34 21 40 20

U 7 2 9 4

(N ) 61 52 53 55

F is the percentage of respondents who thought the lower price offer was fair, A is the percentage of

respondents who thought the lower price offer was acceptable, NF is the percentage of respondents who

thought the lower price offer was not so fair, and U is the percentage of respondents who thought the

lower price offer was unfair.


the seller. In Scenario 3, the potential buyer was considered as imposing a loss sincehis lower offer was to counterbalance a loss he suffered in a completely separatetransaction.

One ambiguous situation is when the potential buyer lowered his offer since heknew the seller was under pressure to sell or rent. In this scenario there was one ques-tion set, selling a house that is priced in dollars, where 62% of respondents consid-ered the lower price offer as either unfair or not so fair, and another question set,selling a house that is priced in shekels, where a significant minority of respondents(48%) considered the low price offer as either unfair or not so fair. It seems that theserespondents thought that the buyer’s offer was imposing a loss on the seller. How-ever, one could also claim that it was the pressure to sell which was causing the sellerto lose and not the actions of the buyer. Hence, overall for all four question sets bythis scenario, a majority of respondents considered the lower price offer to be fair oracceptable.

3.2.2. A comparison between the survey resultsWe see that there is a concern for fairness even with regard to the seller, yet this

concern is less than by the buyer. While by the survey from the seller’s perspective,there were seven cases where a majority of respondents thought the lower price offerwas either unfair or not so fair, with regard to the survey from the buyer’s perspec-tive, there were 17 cases in Table 1 where a majority of respondents thought the priceincrease was either unfair or not so fair.

The different responses suggest that respondents had a more lenient standard asto what is considered as imposing a loss with regard to a buyer than by a seller. Anexample of the different standards can be seen in a comparison of the responses toincreases and decreases in the general demand. When there was an increase in gen-eral demand, a substantial majority of respondents (Scenario 4 of Table 1) thoughtit was either unfair or not so fair for the seller to raise the price, which means thatthey viewed the price increase as imposing a loss on the buyer. However, when thelower price offer was in response to reduced interest in the house, which is adecrease in general demand, there was no question set (Scenario 4 of Table 3)where a majority of respondents thought it was either unfair or not so fair for apotential buyer to lower his offer price. Apparently, by the lower price offer themarket conditions were viewed as imposing the loss on the seller and not thepotential buyer.

The distinction between buyer and sellers also occurs when the price change is dueto a specific dependence of the other participant. As discussed above, there was anambiguity whether a lower price offer due to a buyer’s knowledge that the seller isunder pressure to sell was considered as imposing a loss upon the seller. However,in the survey from the buyer’s perspective, it was overwhelmingly considered unfairfor a buyer to raise his prices when he knew that the buyer had a specific reason fordesiring the house (Scenario 5 of Table 1). Thus, the price increase was consistentlyconsidered as imposing a loss upon the buyer, while in similar situation the lowerprice offer was viewed ambiguously.


Another example of the dichotomy between the buyer and seller is when there wasa price change with no accompanying explanation. In the survey from the buyer’sperspective, a substantial majority of respondents thought a higher price with no ex-planation was either unfair or not so fair (Scenario 1 of Table 1). However, in thesurvey from the seller’s perspective, there were only two question sets, where a ma-jority of respondents thought it was either unfair or not so fair for the potentialbuyer to lower the offer without providing a reason (Scenario 1 of Table 3). Oncethe buyer is allowed more leeway as to what is considered to be imposing a loss, thenthe buyer is also under less obligation to explain changes in price offers.

4. Conclusion

The survey results reported in this paper make six contributions to the literature onfair prices that has developed since Kahneman et al.’s (1986a, 1986b) initial studies:

1. The survey results reconfirm that the concern for fair prices is a universal beliefand that consumers might punish ‘‘unfair’’ firms depending on how unfair theyconsider the price.

2. This concern for fair prices exists by some goods that are assets such as houses.3. The survey results provide additional support for the dual entitlement theory, but

again it was demonstrated that the theory can only explain a majority but not allconsumers’ sense of unfairness in the marketplace.

4. The survey results demonstrate that consumers do not think a price increase is fairdue to an increase in costs when their sole knowledge of the increase in costs isfrom the seller.

5. A hierarchy of consumers’ reactions to price increases was developed based on therationales for the price increase.

6. The question of unfair prices from the perspective of the seller was examined, andit was found that in some situations sellers believe that the price received in atransaction is unfair.

The survey results suggest several areas for future research. First, the robustness ofthe results here needs to be checked. For example, the question of unfairness from theseller’s perspective needs to be further tested to see whether the results here are uniqueto the Israeli housing market. Also, are the other results here specific to the housingmarket or did they apply to all goods? For example, the finding that consumers do notconsider price increases due to higher costs fair when the claims of higher costs cannotbe verified should be tested with other goods. Other questions are, does the concernfor fairness exist by other assets? Does it exist by luxury goods? Second, the accumu-lated evidence that the concern for fairness exists in the marketplace suggests that in-corporating this concern into economic models could enhance price theory. While thiswill complicate economic models, the increase in explanatory value may well be worththe cost. The value of such enhanced models can only be determined once the modelshave been developed, and these models await future research.


Acknowledgements

I would like to thank Peter Earl and two anonymous referees for their very helpfulcomments. If any reader desires to see the complete set of survey questions and/orthe raw data, please contact me at [email protected].

Appendix A

Below is one set of the survey questions. All the other sets of survey questions fol-lowed the same basic format except that the survey could also be from the seller’sperspective, the price could be in shekels and the questions could refer to the rentalmarket.

A.1. Question set I – Buying a house that is priced in dollars

Imagine that you are seeking to purchase a house, and after a long period of timeyou found a house that is being built and costs $200,000. You are so happy with thehouse that really you would be willing to pay $240,000.

A.1.1. Scenario 1When you come to the contractor to buy the house, he informs you that the price

has increased to $240,000 without giving any reason. How do you rate the actions ofthe contractor? 1. Fair 2. Acceptable 3. Not so fair 4. Unfair.

Will the new price stop you from purchasing the house? 1. Yes 2. No 3. Do notknow.

A.1.2. Scenario 2When you come to the contractor to buy the house he informs you that that the

price has increased to $240,000 because there was an appreciation of the shekel by20% with regard to the dollar. How do you rate the actions of the contractor? 1. Fair2. Acceptable 3. Not so fair 4. Unfair.



has increased to $240,000 because he claims that his costs have increased by 20%.How do you rate the actions of the contractor? 1. Fair 2. Acceptable 3. Not so fair4. Unfair.



has increased to $240,000 because many people expressed interest in the house. How


do you rate the actions of the contractor? 1. Fair 2. Acceptable 3. Not so fair 4.Unfair.



has increased to $240,000 because he knows that you have a specific reason for de-siring the house. How would you rate the actions of the contractor? 1. Fair 2. Ac-ceptable 3. Not so fair 4. Unfair.


A.1.6. Scenario 6During the negotiations regarding buying the house, there is a depreciation of the

shekel by 20% with regard to the dollar and the contractor maintains the price at$200,000. How do you rate the actions of the contractor? 1. Fair 2. Acceptable 3.Not so fair 4. Unfair.


References

Blinder, A. S., Canetti, E. R. D., Lebow, D. E., & Rudd, J. B. (1998). Asking about prices: A new approach

to understanding price stickiness. New York: Russell Sage Foundation.

Campbell, M. C. (1999). Perceptions of price unfairness: antecedents and consequences. Journal of

Marketing Research, 36, 187–199.

Chernow, R. (1998). Titan: The life of John D. Rockefeller, Sr. New York, NY: Random House.

Dickson, P., & Kalapurakal, R. (1994). The use and perceived fairness of price-setting rules in the bulk

electricity market. Journal of Economic Psychology, 15, 427–448.

Frey, B. S., & Pommerehne, W. (1993). On the fairness of pricing – An empirical survey among the general

population. Journal of Economic Behavior and Organization, 20, 295–307.

Gorman, R., & Kehr, J. (1992). Fairness as a constraint on profit seeking: comment. American Economic

Review, 82, 355–358.

Kachelmeier, S. J., Limberg, S. T., & Schadewald, M. S. (1991). Fairness in markets: a laboratory

investigation. Journal of Economic Psychology, 12, 447–464.

Kahneman, D., Knetsch, J., & Thaler, R. (1986a). Fairness as a constraint on profit seeking: entitlements

in the market. American Economic Review, 76, 728–741.

Kahneman, D., Knetsch, J., & Thaler, R. (1986b). Fairness and the assumptions of economics. Journal of

Business, 59, S285–S300.

Kaufmann, P. J., Ortmeyer, G., & Smith, N. C. (1991). Fairness in consumer pricing. Journal of Consumer

Policy, 14, 117–140.

Konow, J. (1996). A positive theory of economic fairness. Journal of Economic Behavior and Organization,

31, 13–35.

Kristensen, H. (2000). Does fairness matter in corporate takeovers? Journal of Economic Psychology, 21,

43–56.

Langholm, O. (1998). The medieval schoolmen. In S. T. Lowry, & B. Gordon (Eds.), Ancient and medieval

economic ideas and concepts of social justice (pp. 439–502). Brill: Leiden.


Piron, R., & Fernandez, L. (1995). Are fairness constraints on profit seeking important? Journal of

Economic Psychology, 16, 73–96.

Seligman, D., & Schwartz, B. (1997). Domain specificity of fairness judgments in economics transactions.

Journal of Economic Psychology, 18, 579–604.

Walster, Walster, G. W., & Berscheid, E. (1978). Equity theory and research. Boston, MA: Allyn and

Young.


Concern for fair prices in the Israeli housing market

Documents

Transcript of Concern for fair prices in the Israeli housing market