How Corporate Reputation Affects Customers

8/10/2019 How Corporate Reputation Affects Customers

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How corporate reputation affects customers

reactions to price increases

ABSTRACT The study investigates the impact corporate reputation has on cognitive,

affective and

behavioural customer reactions after price increases Specifically, it includes inferred

motive, price fairness,

anger and purchase intentions !n the basis of e"uity theory, attribution theory and

the theory of cognitive

dissonance, the conceptual model is developed and tested using an e#perimental

design set in the airline

industry $artial %east S"uares serves to determine direct, mediated and moderating

effects &indings confirm

that the more favourable the perceived reputation, the less li'ely customers are to

attribute negative motives for

the price increase or price unfairness A larger price increase does not diminish the

impact reputation has onperceived price fairness or on purchase intentions Reputation also has an effect on

anger mediated by price

fairness &irms should consider corporate reputation in pricing strategies as analysis

of reputation can assist in

forecasting consumer reactions to price increases and in augmenting profitability

()TR!*+CT(!)

ffective revenue and price management

re"uires correct forecast of customers reactions

to price changes -Homburg et al, .//01

Although price increases are typically three to

four times more effective in increasing profitability


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than a proportionate increase in sales

volume -2arn and Rosiello, 344.1, the actual

profit leverage depends on customers behavioural

responses towards the specific price

change (t is essential to understand possible

negative customer reactions to price increases

such as deteriorated customer attitudes, defection,

unfavourable word of mouth or boycotts,

as well as the factors that aid in preventing them

-*odds et al, 34435 Bolton and %emon, 34445

6ohli and Suri, ./331 To date, however,

customer reactions to price increases received

relatively little scholarly attention

(n this regard, the effects of perceived corporate

reputation should be of considerable managerial

and academic interest A favourable corporate

reputation may increase customers value perceptions,

willingness to pay and purchase intentions

despite the price variation -for e#ample,

%andon and Smith, 34475 berl and Schwaiger,

.//05 8raham and Bansal, .//71 (t is often

e#pected that a firm with a favourable reputation

can charge a price premium -Shapiro, 349:5

)eville et al, .//05 Cheema, .//91 because

reputation signals high "uality of products and

services -Shapiro, 349:1 and creates customerperceived

value -$etric', .//.1

Although numerous studies have attempted

to determine the e#act nature of the relationship


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between corporate reputation and financial

success -for e#ample, ;ergin and related benefit and price perceptions

of customers -Alba et al, 3441, our focus on

corporate reputation adds a broader perspective

Second, in adding to e#tant 'nowledge

regarding the interplay of reputation and

customers willingness to pay -%andon and

Smith, 34475 8raham and Bansal, .//71, we


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empirically investigate the impact of corporate

reputation on cognitive, affective and behavioural

customer reactions after price increases

&inally, this investigation of corporate reputation

provides a response to Taylor and 6imes

-./331, who advise researchers and managers to

focus on pricing fairness and its determinants

because of the strong relationship to purchase

intentions

%(TRAT+R R;(=

As has been well established, price increases

have a significant and immediate impact on

profitability of the firm !f all the tools available

to mar'eting managers, pricing has the

most immediate impact on both the top and

bottom lines -6ohli and Suri, ./33, p .1

However, price increases are also ris'y as they

tend to affect customers value perceptions

-$etric', .//.1 According to prospect theory

-6ahneman and Tvers'y, 34741, which postulates

that people have a tendency to strongly

prefer avoiding losses to ac"uiring gains, it

would seem that price increases have a larger

impact on customers value perceptions than

gains in product utility -2onroe, .//01 As

price increases ceteris paribus decrease customers

perceived value, they negatively impact attitudes

towards the firm -*odds et al, 34431,

leading to dissatisfaction, complaints and negative


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word>of>mouth intentions -Bolton and

%emon, 34445 ia et al, .//1 (n most circumstances,

raised prices will decrease demand and

increase switching -for e#ample, 2a#well,

.//.1 (n some cases, more drastic reactions

such as product boycotts may result -ia et al,

.//1 Such behavioural reactions following a

price increase are of specific managerial interest

because they directly impact profitability -6ohli

and Suri, ./331

The siDe of the price increase plays a central role

when studying customer reactions -for e#ample,

*awes, .//41 (n addition, price fairness

Eudgments which involve a comparison of a

price or procedure with a pertinent standard,

reference, or norm -ia et al, .//, p 31 are a

recurring variable in research studies -Campbell,

34445 Homburg et al, .//05 Campbell, .//71

As Taylor and 6imes -./33, p .7.1 pointed

out, -p1erceived fairness is paramount to longterm

revenue ma#imiDation (f a price is perceived to be unfair, the process of price

determination is also most li'ely to be perceived

as unfair -2a#well, .//.1 According to the

dual>entitlement principle -6ahneman et al,

349F1, a firm cannot increase its profits by

arbitrarily violating the entitlement of its customers

to the terms of the reference transaction

and reference price Customers will accept

passed>on cost increases, but will perceive price


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increases as unfair if they serve to ma#imiDe seller

profits -2artins and 2onroe, 3441 Thus, customer

reactions do not depend on the absolute

price increase but on the conte#t (n cases when

motives are perceived as fair -as, for instance, in

the case of increased costs for raw materials1 more

favourable customer reactions can be e#pected

compared with cases when they have no information

on motives or perceive these as unfair

-2a#well, .//.1 A perspective largely neglected

in the literature ta'es into account the emotional

reactions associated with price increases -!)eill

and %ambert, .//35 ia et al, .//1 motions

are mental states of readiness that arise from

appraisals of events or ones own thoughts

-BagoDDi et al, 3444, p 391 *epending on their

emotional state, customers will perceive the same

price differently -)am'ung and Gang, ./3/1

motions may also be an outcome of price

variation -Campbell, .//71 &or instance, price

increases may evo'e negative emotions -ia et al,

.//1 such as anger &inally, evaluations of the firm

are also relevant for customer reactions such as

satisfaction -Homburg et al, .//01, past pricing

strategies -+rbany and *ic'son, 34431 or reputation

-ia et al, .//1

Corporate reputation is a global perception

of the e#tent to which an organisation is held in

high esteem or regard -=eiss et al, 3444, p 701


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and as such reflects its relative success in fulfilling

the e#pectations of multiple sta'eholders

-=alsh and Beatty, .//71 (t is a socio>cognitive

construct based on the impressions people share

about a firm -Highhouse et al, .//41 Summarising

different definitions, 8otsi and =ilson

-.//3, p .01 conclude that corporate reputation

is a sta'eholders overall evaluation of a company

over time This evaluation is based on

the sta'eholders direct e#periences with the

company, any other form of communication

and symbolism that provides information

about the firms actions andor a comparison

with the actions of other leading rivals =hile

information sources used for assessing a firm

may differ for each sta'eholder and different

reputational perceptions may e#ist for the

same firm, it has been suggested that a core

set of reputation attributes are shared across

sta'eholders Regarding these shared attributes,

reputational perception among sta'eholders

is aligned -Bromley, .//35 Highhouse

et al, .//41

The "uality of products and services is one of

these shared attributes -Helm, .//71 All sta'eholder

groups, but specifically customers, associate

high>"uality offerings with a good corporate

reputation -Ioon et al, 344:5 )eville et al, .//01

Reputation facilitates decision>ma'ing processes


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of customers and serves as a heuristic stimulating

purchase behaviour -Chun, .//01 (ncreased

customer ac"uisition, satisfaction and loyalty,

improved product and brand attitudes, higher

repurchase and cross>buying intentions, positive

word of mouth, and increased willingness to pay

are effects of corporate reputation associated

with customer demand and firm profitability

-for e#ample, Ioon et al, 344:5 ;ergin and

off between product or service "uality and

price -for e#ample, Sweeney and Soutar, .//31 However, additional factors may add

to better

understanding of customers value perceptions


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$etric' -.//.1, for instance, suggested that corporate

reputation is a dimension of perceived

value but, in a later study, failed to determine

a direct effect of reputation on perceived value

However, reputation strongly affected "uality

perceptions -$etric', .//1 Hansen et al -.//91

argued that corporate reputation should have

a direct effect not only on the benefit side

of the value e"uation but also on the cost

side, and e#plained that if a suppliers reputation

is superior to its competitors less resources will

be allocated towards safeguarding activities That

in turn reduces monitoring costs for customers

The authors find a strong direct effect of corporate

reputation on perceived customer value in

business services

As companies with a favourable reputation

offer customers more value, it is to be

e#pected that they can charge higher prices

Although the relationship between corporate

reputation and price premiums is increasingly

discussed in the literature, the impact of

reputation in cases of price increase has

remained rather uncertain !ur research adds

to the noted study conducted by Campbell

-34441 which was limited to a specific setting

-one>time auction1 and analysed reputation as

a moderator of the impact of inferred relative

firm profit on inferred motive =e broaden


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this perspective and investigate the effect of

corporate reputation on a wider set of reactions

in the case of a regular price increase in a

more familiar consumption setting

TH!RIA)* HI$!THSS

=e use e"uity theory, the theory of cognitive

dissonance and attribution theory to e#plain

how corporate reputation affects customer

reactions to price increases "uity theory

-Adams, 34F01 focuses on customer assessments

of the costs and benefits of a transaction "uity

theory is based on the concept of social

e#change -Homans, 34091, postulating that

people evaluate e#change situations by Eudging

the distributive fairness of the e#change

(ne"uity e#ists if an individual perceives that

their outcomeJinput relation is smaller than that

of a reference person or the e#change partner

-that is, the firm1 $erceived ine"uity leads to

tension which J as e#plicated in the theory of

cognitive dissonance -&estinger, 34071 J evo'es

emotional as well as behavioural reactions

-Adams, 34F05 )am'ung and Gang, ./3/1

Some possible reactions are dissatisfaction and

anger The e#tent of emotional reaction

depends on the degree of perceived distributive

ine"uity -Adams, 34F01 "uity theory has been

applied in the conte#t of pricing and reactions

to price increases -for e#ample, 2artins and


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2onroe, 3445 Homburg et al, .//01 and

suggests that a customer compares the relation

of outcome and input before and after the price

increase (f the net benefit after the price

increase is smaller, the customer is e#pected to

perceive dissonance -&estinger, 34071 and

reduced fairness -Adams, 34F01 The e#tent of

the dissonance is affected by attributions made

regarding the reasons for the price increase

-!)eill and $almer, .//1

Attribution theory -Heider, 34095 =einer,

349F1 e#plains how people with limited or

no information attempt to find e#planations

for events that are surprising, negative andor

important to them -=einer, 349F1, and predicts

that ascription of causes or causal attributions

influence subse"uent perceptions

and behaviour Customers ma'e attributions

about a broad range of different events

such as product and service failures, reasons

for brand switching and employee stri'es, or

celebrities motivations for endorsing products

-*ean, .//1

(t is li'ely that customers also ma'e attributions

and develop their own subEective interpretation

regarding price increases if the actual

reasons remain un'nown -Campbell, 34445

2a#well, .//.5 ia et al, .//1 The presumed

motives for the price increase are li'ely to be


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consistent with the firms reputation as the

latter derives from the firms past actions

-Campbell, 34441 As ia et al -.//, p 01 pointed out? A sellers good reputation

may KLM

decrease buyers price unfairness perceptions

when a disadvantaged price ine"uality occurs

because customers grant the benefit of the

doubt regarding the reasons for the price

increase if they li'e the firm -Campbell, 34441

Comparable findings are reported by Coombs

and Holladay -.//F1 who investigated the role

of reputation in the conte#t of product crises

and found that a favourable reputation can

create a halo shielding the firm from negative

customer reactions

!ne might, however, also come to the

contrary conclusion Customers have high

e#pectations regarding well>reputed companies

As reputation is formed over time, based

on what the organiDation has done and how it

has behaved -Balmer and 8reyser, .//:1, the

price increase may violate e#pectations regarding

the firms conduct (n such situations,

negative events are graver as people ta'e pree#isting

attitudes or e#pectations into account

when evaluating new events or obEects

-Brown and *acin, 34471 Thus, higher customer

e#pectations regarding future actions

might actually disadvantage well>reputed


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companies -Coombs and Holladay, .//F1 &or

instance, the study on product recalls conducted

by Rhee and Haunschild -.//F1 found that,

because of the e#pectancy violation effect, wellreputed

firms can suffer a liability relative to

badly reputed firms, ma'ing reputation a double>

edged sword in that it may have a significant

downside However, the e#pectancy violation

effect could be neutraliDed in the case of price

increases which are rather commonplace in

todays mar'ets Customers often attempt to

avoid or reduce dissonance by selective e#posure

to or re>assessment of information -&estinger,

34071 and they might ignore information that

violates or contradicts their e#pectations regarding

a firm they already view favourably -Coombs

and Holladay, .//31 This is in line with

the theory of motivated reasoning -Gain and

2aheswaran, .///1 which postulates that customers

are motivated to yield preferred conclusions

resulting in biased processing of new information

-*ean, .//1 Thus, it is li'ely that customers

will give well>reputed firms the benefit of the

doubt and not infer negative motives for a given

price increase Hence, we hypothesiDe that?

Hypothesis 3? The more favourable customers

perceptions of corporate reputation,

the less negative their perceptions of the

firms motive for the price increase


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Reputation is often associated with legitimacy

and consistency -6ing and =hetten, .//91

e#plaining why customers are more li'ely to

perceive a price increase as fair if the firm has a

favourable reputation Corporate reputation

serves as a heuristic for customers in attributing

motives for the price increase However, this

benefit of the doubt should no longer be granted

if the price increase reaches a certain level, meaning

that the siDe of the price increase negatively

moderates the relationship between reputation

and perceived fairness =e hypothesiDe that?

Hypothesis .a? The more favourable customers


the higher their perceptions of price fairness

Hypothesis .b? The larger the price increase,

the wea'er the positive effect of corporate

reputation on perceived price fairness

(f the cause for a negative event is stable

and controllable by the firm, customers may

develop negative emotions -=einer, 349F5

&ol'es et al, 34971 which is also a li'ely response

to price increases (n his e#planation of attribution

theory,=einer -349F1 stated that customers

appraisal of an event and resulting emotions and

cognitions are guided by the identified causal

dimensions Anger, for instance, is brought

about by negative situations that one believes

could have been controlled by someone else


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-=atson and Spence, .//7, p 0/.1 Accordingly,

customers of a well>reputed firm who perceive a

price increase as fair -not controllable1 should not

be li'ely to e#perience anger (t is hypothesiDed?

Hypothesis :? The more favourable customers


the lower their anger This relationship is completely mediated by perceived price

fairness

The positive relationship between corporate

reputation and -re1purchase intentions has been

theoretically and empirically supported in

numerous studies -for e#ample, Shapiro, 349:5

Ioon et al, 344:5 Geng, .//91 However, as the

benefit of the doubt induced by corporate

reputation may be attenuated if the price increase

surpasses a certain level, negative customer reactions

can occur despite a favourable corporate

reputation The more substantial the price

increase, the larger the decrease in customer

demand, that is, purchase intentions and purchase

behaviour -Bolton and %emon, 34445 Homburg

et al, .//05 *awes, .//41=e hypothesiDe?

Hypothesis a? The more favourable customers


the higher their purchase intentions

Hypothesis b? The larger the price increase,

the wea'er the positive effect of corporate

reputation on purchase intentions

As noted earlier, e#tant literature accepts the


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notion that customer reactions to prices and

price increases depend on the -assumed1 reasons

or motives for the price increase that determine

perceptions of price fairness -2artins and

2onroe, 3445 Campbell, 34445 2a#well,

.//.5 ia et al, .//1 )egative motives for the

price increase lead to perceptions of unfairness

=e hypothesiDe?

Hypothesis 0? The more negative customers

view the motive for the price increase, the

lower their perceptions of price fairness

$rior empirical analysis of customer reactions

to price increases has mostly emphasiDed cognitive

factors such as attribution of motives and

fairness -!)eill and %ambert, .//35 Campbell,

.//71, neglecting emotional factors -!)eill and

%ambert, .//35 ia et al, .//1 But already

Homans -34091 argued that when the outcome

of an e#change is lower than e#pected the

recipient is li'ely to feel anger As a price increase

diminishes the customers outcomeinput ratio

while potentially benefitting the firm, this unbalanced

transaction can lead to perceived unfairness

-Adams, 34F01, negative emotional reactions

such as anger, and decreased purchase intentions

This leads us to hypothesiDe that?

Hypothesis F? The larger the price increase,

the lower perceived price fairness

Hypothesis 7? The larger the price increase,


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the greater customers anger

Hypothesis 9? The larger the price increase,

the lower purchase intentions

Customers have been found unli'ely to

continue patroniDing a firm that has behaved in

an unfair manner -6ahneman et al, 349F5

Campbell, 34445 Taylor and 6imes, ./331 &airness

perceptions are also li'ely to impact negative

emotions such as anger -ia et al, .//5

)am'ung and Gang, ./3/1 which in turn strongly

affect behaviour -&ol'es et al, 34971=e therefore

e#pect the effect of fairness perceptions on behavioural

intentions to be mediated by anger -ia

et al, .//1 and hypothesiDe?

Hypothesis 4? The higher customers perceptions

of price fairness, the higher their

purchase intentions This relationship is

partially mediated by anger

The conceptual model for the study is

summariDed in &igure 3

$R(2)TA% ST+*I

Research design and participants

(n order to establish the hypothesiDed relationships,

we conducted an e#periment utiliDing a

.N. between>subEects design =e manipulated

corporate reputation -favourable versus unfavourable1

and price increase -large versus moderate1

All groups were completely randomiDed

(n accordance with prior e#perimental studies


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-for e#ample, *ollinger et al, 34475 Campbell,

34445 Taylor and 6imes, ./331, we employed a

scenario design =e chose the airline industry as the setting

because corporate reputation is specifically

important in airline services due to customers

high>ris' perceptions -%ee, .//05 )eville et al,

.//01 Specifically, as the introduction of lowcost,

new entrant airlines, price variations are

common in this industry -Brunger and $erelli,

.//41 and the price discrimination tactics broadly

employed emphasiDe the role of perceived fairness,

customer trust -2c2ahon>Beattie, ./331

and corporate reputation =e used a student

sample to achieve homogeneity of the sample5

prior studies in reputation research as well as

pricing have successfully employed student samples

as well -Campbell, 34445 2a#well, .//.5

8raham and Bansal, .//71 (n total, .7F business

students from two 8erman public universities

participated in the study =e e#cluded .F "uestionnaires

from further analysis? 3. students

indicated that they had not used airlines in the

year preceding the study and 3 were e#cluded

due to their incomplete data This procedure led

to a net sample siDe of .0/ !f these, 330 -F per

cent1 students were female $articipants were on

average .. years old and their average monthly

income was O0:.

$rocedure


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airline because several of their friends had used it

in the past and they had also seen the airlines

commercials &urthermore, they had recently

read an article on current airline ran'ings conducted

by an independent testing facility To

manipulate reputation positively, participants

were told that, as in recent years, passengers

ran'ed the airline first in service and value for

money The airline was also described as a very

popular employer (n the negative reputation

scenario, the airline was said to have been

ran'ed last and was a very unpopular employer

To establish price and price increase of the

tic'et, we used real mar'et data generated from

a 8erman (nternet flight agency The average

price for the one>way tic'et to %ondon was O00

and price increases between 9 and ./ per cent

were recorded over the time period of the

research proEect Accordingly, we manipulated

the price increase by informing participants that the airline increased prices by O: and

O3/,

respectively Specifically, participants were told

that shortly before they intended to boo' their

flight to %ondon, they learned that the airline

had announced price increases so that the tic'et

would now cost OK:3/M more -the price rose

from O00 to O09F0 including ta#es and fees1

To facilitate subEective attributions of motive

and fairness, we did not provide information


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regarding reasons for the price increase

2easurements of the dependent variables

and the constructs for manipulation chec's were

based on established scales -see Table 3 for

individual items and literature1 Specifically, we

used a global measure for corporate reputation

to reflect shared meanings as reputation, according

to =eiss et al -3444, p 701, tends to be

regarded as a unidimensional, not multidimensional,

construct All items were measured on

seven>point scales with 3 indicating low or

unfavourable values and 7 indicating high or

favourable values &inally, the "uestionnaire

contained demographic information, participants

average annual flight fre"uency, measures

for the realism of the scenario and participants

understanding of the goal of the research

Results

&irst, we chec'ed the realism of the scenarios

$articipants regarded the scenario as realistic and

they could imagine the situation well -Prealistic Q

07, Pimagine Q091 Second, we ensured that

our manipulations of reputation and price

increase were successful =e established a significant

main effect of the factor corporate

reputation on perceived reputation -&-35

.F1Q00FF., $///31 whereas the main

effect of the siDe of the price increase was not

significant -&-35 .F1Q/:47, ns1 This means


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that perceived reputation was only influenced

by the manipulation of reputation, not the

manipulation of price increase =e then confirmed

successful manipulation of positive and

negative reputation -Ppos repQ00., Pneg repQ

., t-df Q.91Q.:9F, $///31 2anipulation

of price increase did not affect

reputation -P$(lowQ:4, P$(high Q:4/, t-dfQ

.91Q/397, ns1

)e#t, we assessed convergent validity for the

construct measures using factor loadings

-/7F1, t>values -370F1 and composite reliability

-CR/971 To fully satisfy re"uirements

for discriminant validity, average variance

e#tracted -A;1 has to e#ceed the recommended

threshold of /0 and to be larger than

the variance shared between constructs -&ornelland %arc'er, 34931 All s"uared covariances

were smaller than the A; -A;/7/1 See

Table 3 for detailed results

&ollowing BagoDDi et als -34431 suggestions

for analysing e#perimental data, we employed

$artial %east S"uares -$%S1 analysis which wor's

well with comparatively small sample siDes and

binary variables -see also %ei et al, .//91 As a

non>parametric estimation procedure, $%S uses

as its conceptual core an iterative combination

of principal components analysis that relates


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measures to constructs and path analysis that

captures the structural model of constructs

+sing the bootstrap procedure pac'aged in the

Smart$%S ./ software -Ringle et al, .//01, we

calculated the standard deviation and an

appro#imate t>statistic To assess the structural

model, we evaluated path coefficients and t>tests

as well as the coefficient of determination -R.1

(n addition, the predictive relevance of the $%S

model can be assessed using the Stone>8eisser

sample reuse techni"ue -


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Anger on $urchase intention and the effect of

#tent of price increase on Anger, effects were

significant at the 0 per cent level

To better understand potential mediated

effects, mediation was tested according to the

method suggested by Baron and 6enny -349F1

Structural e"uation models allow for simultaneously

estimating the direct path -for e#ample,

Corporate reputationJAnger1 and the indirect

path -for e#ample, Corporate reputationJ$rice

fairnessJAnger1 That is, the mediated effect is

tested while statistically controlling for the

direct path To establish the mediating effect,

the indirect effect must be significant To test

for significance, we applied a Sobel test -Baron

and 6enny, 349F1 The relationship between

Corporate reputation and Anger was fully

mediated by $rice fairness -DQ:731, meaning

that the effect of Corporate reputation on

Anger was fully dependent on how customers

perceive the fairness of the price increase $rice

fairness affected purchase intentions significantly

but, contrary to our e#pectation, the effect was

not mediated by Anger 8iven that no significant

effect of Anger on $urchase intention

could be established, there also was no mediation

effect

&inally, we chec'ed the proposed moderating

effects of #tent of price increase


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2oderating effects impact the strength andor

direction of the relationship between e#ogenous

and endogenous variables -Baron and

6enny, 349F1 and can be estimated based on

interaction effects -for e#ample, %ei et al, .//91

The interaction effect can be assessed using the

coefficient of determination -R.1 to calculate

the effect siDe - f .1 However, effect siDes of

#tent of price increase were negligible

- f .Q///: and ///9/1

*(SC+SS(!)

The study results provide support for most of

the hypothesiDed direct effects Results confirm

that perceived corporate reputation plays an

important role in understanding customer reactions

to price increases &irst, we could establish

a significant effect of reputation on perceived

motives of the firm, supporting Hypothesis 3

The more favourable the perceived reputation,

the less li'ely customers are to attribute negative

motives for the price increase However, the

share of variance e#plained is low, meaning that

reputation alone is not sufficient in determining

the valence of the motive Additional factors

such as the general economic conditions of the

industry or competitors actions might additionally

aid customers in attributing motives for

price increases (n support of Hypothesis .a,

perceived reputation was found to impact perceived


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price fairness (f companies with a

favourable reputation are raising prices, customers

are more li'ely to accept this as a fair move

compared with companies with an unfavourable

reputation The moderating effects of the

e#tent of the price increase suggested in

Hypothesis .b could not be established indicating

that the relationship between perceived

reputation and perceived price fairness is not

affected by the e#tent of the price increase

ven if customers perceive a price increase as

larger, this may not diminish the impact reputation

has on perceived price fairness

=e could also show that perceived corporate

reputation has an effect on anger which in

confirmation of Hypothesis : is completely mediated by perceived price fairness

Reputation

alone does not affect the emotional reaction

to a price increase5 emotional reaction

largely depends on perceived fairness of the

price increase (n addition, while directly and

significantly impacting purchase intentions in

support of Hypothesis a, the moderating effect

of the e#tent of the price increase suggested in

Hypothesis b could also not be established

The impact of reputation on purchase intentions

is not affected by the e#tent of the price

increase This may mean that corporate reputation

is a stable determinant of purchase intentions


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regardless of the siDe of a price increase

The e#tent of the price increase showed a

significant negative effect on purchase intentions

in support of Hypothesis 9 $erceived

price fairness is significantly affected by the

e#tent and the perceived motive for the price

increase, supporting Hypothesis 0 and Hypothesis

F (f the price increase appears to be large or

customers perceive a negative motive for the

price increase, perceived price fairness decreases

The e#tent of the price increase, however, did

not directly affect anger leading us to reEect

Hypothesis 7 $rice fairness directly and significantly

affected purchase intentions as well as

anger as an emotional reaction to price

increases This means that the more positive

the cognitive appraisal of a price increase, the

less li'ely customers are to become angry =e

found no significant relationship, however,

between anger and purchase intentions, meaning

that the mediated effect of anger on the

relationship between price fairness and purchase

intentions as hypothesiDed in Hypothesis 4 had

to be dismissed

(2$%(CAT(!)S

The study results indicate that it pays off for

companies to invest in their reputation as it

buffers from negative repercussions of price

increases This might be specifically relevant for


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industries using dynamic pricing where competitors

face the ris' of entering price wars, such

as airlines -Burger and &uchs, .//01 Here,

perceptions of fairness and reputation may

become particularly important as multiple

prices e#ist for ostensibly identical units of

output -2c2ahon>Beattie, ./331 8iven the

high effectiveness of price increases in augmenting

profitability -2arn and Rosiello, 344.5

Homburg et al, .//01, such findings are important

in gauging customer reactions =e showed

that a favourable reputation enables firms to

command higher prices without having to face

the negative reactions a badly reputed firm

would have to fear Higher reputation also leads

to increased purchase intentions, positively

impacting sales Although pricing has to be

modified very carefully -6ohli and Suri, ./331,

a firm with a good reputation seems to have

more leeway in raising prices

Before establishing price increases, managers

should therefore ta'e into account the firms

reputational standing But not only is reputation

notoriously hard to monitor -=alsh and Beatty,

.//71, a strong emphasis on short>term sales

ma#imiDation could conflict with the achievement

of a favourable reputation -Avlonitis and

(ndounas, .//01 2anagers may feel tempted by

the short>term profits resulting from e#ploitation


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of a favourable reputation, specifically as

most incentive schemes implemented in firms

today are not necessarily geared to safeguard

long>term assets such as reputation

Some industries are in the limelight of public

discourse more than others $rice increases that

affect broad segments of the population such as

travel and mobility, food, insurance or health

care are widely discussed by the media and the

citiDens Here, favourable corporate reputation

can help to reduce negative repercussions (n

the long term, however, reputation is also li'ely

to be affected by pricing decisions, calling for

a careful approach in communicating price

changes (t is important to note that customer

perception of the reason underlying a price

increase has a strong impact on perceived price

fairness As our study implies, perceptions of

motives for the price increase and price fairness

are affected by corporate reputation, granting

good companies the benefit of the doubt when increasing prices Airlines and other

companies

should recogniDe how important psychological

aspects such as perceived corporate

reputation are in the establishment of effective

pricing strategies -)am'ung and Gang, ./3/1

%(2(TAT(!)S A)* &+T+R

RSARCH !$$!RT+)(T(S

!ur study e#hibits limitations and offers several


30/32

opportunities for further research &irst, general

disadvantages from using a student sample have to

be considered, although we may assume acceptable

e#ternal validity as we ensured that the

student participants were familiar with the service

category -%ynch, 34441 +sing a more heterogeneous

customer sample could result in more

variance and would also facilitate inclusion of

additional personal characteristics Similarly, general

concerns regarding the use of fictitious

scenarios and e#perimental designs apply As

online channels account for the maEority of airline

tic'et sales -Brunger and $erelli, .//41, our

scenario was realistic However, information presented

to participants may have been more

condensed than is usually the case although airline

customers have been found to use rather limited

search strategies -Brunger and $erelli, .//41 By

including real companies or brands, future studies

could focus on the interplay between reputation

and participants prior e#periences with the firm,

thereby shedding light on possible conte#t or

e#pectancy violation effects -Brown and *acin,

34475 Rhee and Haunschild, .//F1

The manipulation of reputation in e#perimental

designs is prone to criticism, given that

reputation is thought to evolve over time -8otsi

and =ilson, .//31 !ur e#perimental manipulations

aimed at improving internal validity by


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identifying shared reputational criteria while

including different hypothetical information

sources -Bennett and 6ottasD, .///1 As we

attempted to create a realistic scenario, we

e#cluded information on the firms motivations

in increasing prices which are often not made

public However, this may have decreased the

manipulations strength in evo'ing a strong

emotion such as anger A similar finding

was reported by )am'ung and Gang -./3/1 (n

their study on service fairness, they established

a non>significant relationship between

negative emotion and behavioural intentions

and interpret this as a result of participants

variations in emotional e#pressivity andor

involvement that could obstruct the e#pression

of negative feelings, even on self>reported "uestionnaire

-)am'ung and Gang, ./3/, p 3.0/1

A scenario suggesting a self>interested motive of

the firm might elicit stronger anger in participants

(n addition, anger resulting from the price

increase might not impact purchase intentions

but variables outside the nomological networ'

of our study, for instance complaint intentions

or word of mouth -=atson and Spence, .//71

This suggests that future studies might include

additional outcome variables as well as other

emotional reactions The strength of these

emotions might also depend on the way the


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price increase is communicated to customers,

adding another possible avenue for research

Studies in different industries characteriDed

by more or less price transparency could add to

a better understanding of the role of reputation

and possible customer reactions *etermination

of thresholds between large and small price

increases or inclusion of dynamic pricing

schemes would offer clear guidance for mar'eters

in optimiDing pricing strategies To date,

research on dynamic pricing has only e#plored

revenue impacts -Burger and &uchs, .//01, but

not the effects on other value components, such

as reputation &inally, it would be beneficial to

analyse how pricing strategies that focus on

short>term profit ma#imiDation affect long>term

management of intangible assets such as reputation

-*oyle, .//91 This would not only be of

interest for pricing and reputation management

but would also be relevant at the level of

corporate governance and public discourse

How Corporate Reputation Affects Customers

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