The influence of price fairness on customer satisfaction an empirical test in the context of automobile

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The influence of price fairness on customer satisfaction: an empirical test in the context of automobile purchases

Andreas Herrmann Lan Xia Kent B. Monroe Frank Huber

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The influence of price fairness on customer satisfaction: an empirical test in the context of

automobile purchases

Andreas Herrmann

University of St Gallen, St Gallen, Switzerland

Lan Xia

Marketing Department, Bentley College, Waltham, Massachusetts, USA

Kent B. Monroe

University of Illinois and University of Richmond, Glen Allen, Virginia, USA, and

Frank Huber

University of Mainz, Mainz, Germany

Abstract

Purpose– This paper aims to link conceptually the concepts of price fairness and customer satisfaction and empirically demonstrate the influence of perceived price fairness on satisfaction judgments. Further, it seeks to examine specific factors that influence fairness perceptions including price perception and consumer vulnerability.

Design/methodology/approach– The study is conducted in the context of automobile purchases in major German car dealerships. Based on a theoretical conceptualization of the constructs and an empirical pretest, 246 car buyers were surveyed and their fairness perceptions and satisfaction judgments with the car buying process measured.

Findings – The research shows that price perceptions directly influence satisfaction judgments as well as indirectly through perceptions of price fairness. Results also indicated that consumers’ vulnerability, which is induced by a perceived demand-supply relationship and the urgency of need from the consumers’ side, had a negative effect on perceived price offer fairness.

Research limitations/implications– The research demonstrated the influence of perceived price fairness on satisfaction judgments empirically. The study was conducted in the context of car purchases and the generalizability of the model should be further tested.

Practical implications– The effect of consumer vulnerability implies that sellers should not only avoid exploiting their customers but should also anticipate consumers’ potential feelings of being exploited. Being sensitive to the buyers’ psychological state and assuring buyers of fair treatment will enhance perceptions of price fairness without changing the price offer.

Originality/value– Both the direct and indirect effects of price perception on satisfaction judgment were examined in the paper. Specifically, the influences of consumer vulnerability and price procedure fairness on satisfaction judgments are new and contribute to the dual-entitlement principle and our existing knowledge in price fairness.

KeywordsFair value, Customer satisfaction, Prices, Perception Paper typeResearch paper

Previous research on customer satisfaction has examined factors that enhance customer satisfaction in various contexts (for recent reviews see, Oliver, 1997; Szymanski and Henard, 2001; Shankar et al., 2003). As an important factor in the marketing mix, the role of product or service price in the

formation of customer satisfaction has not been studied extensively in previous customer satisfaction research (Voss et al., 1998). When price has been included, it has been one of several product attributes considered relevant (Fornellet al., 1996; Voss et al., 1998); however, the unique influence of product price on satisfaction judgments remains unclear. In this research we include consumers’ price perceptions as an important factor influencing overall satisfaction judgments.

This influence is both direct, and indirect via price fairness perceptions.

Voss et al. (1998) argue that satisfaction is a function of price, performance and expectations with support for the expectations-satisfaction link being weak. They propose that, in contrast to performance, perceived price fairness might be The current issue and full text archive of this journal is available at

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Journal of Product & Brand Management 16/1 (2007) 49 – 58

qEmerald Group Publishing Limited [ISSN 1061-0421]

[DOI 10.1108/10610420710731151]

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the dominant determinant of satisfaction. Their empirical results suggest that when there was a perceived price- performance inconsistency (i.e., an inequitable or unfair outcome), it had a stronger effect (negative) on satisfaction judgments. Similar results were also found by Oliver and DeSarbo (1988) and Oliver and Swan (1989a).

In addition, research also has shown that equity is related to satisfaction. Equity is a concept closely related to fairness and usually defined as a fairness, rightness, or deservingness judgment that consumers make in reference to comparative others (Oliver, 1997; Xiaet al., 2004). A recent meta-analysis of the empirical research on customer satisfaction found that equity exhibited a dominant effect on satisfaction judgments with a correlation between equity and satisfaction of 0.50 (Szymanski and Henard, 2001). The correlation between expectations and satisfaction was a lower 0.27. However, relative to previous customer satisfaction research, little published research has linked perceptions of price fairness with satisfaction judgments. In this paper, we address this link. Specifically, we extend Vosset al.’s (1998) finding to the issue of perceived fairness. We include two components of price fairness (price offer vs procedure) as well as a consumer psychological characteristic (vulnerability) and examine their effects on satisfaction judgments. We begin with an overview of the satisfaction and fairness concepts leading to a conceptual model and hypotheses. An empirical test of the model using automobile purchases follows.

Conceptual framework Customer satisfaction

Various definitions and measures of customer satisfaction have been used in previous research (Szymanski and Henard, 2001). One approach has been to distinguish between transaction-specific and overall satisfaction (Oliver, 1997).

We distinguish satisfaction with the purchase process (e.g.

product comparisons and interactions with the sales people) and satisfaction with the purchase outcome (i.e. the product purchased). Previous research has shown that these two components of satisfaction are correlated but conceptually distinct (Bitner and Hubbert, 1994; Shankaret al., 2003). For example, in the context of using online decision aids, Bechwati and Xia (2003) found that people’s perceptions of how much “effort” the decision aids exert in providing the recommendations influenced their satisfaction regardless of what options were recommended. Similarly, Spreng et al.

(1993) proposed that customers’ satisfaction with the availability of product information when evaluating various product options has an important influence on overall satisfaction judgments.

These influences may occur particularly for purchases that involve extensive information search and multiple interactions with the seller such as an automobile. The purchase of an automobile involves multiple stages including information search, comparison of alternatives, and interactions with the sales people or service provider. We propose that satisfaction with one stage of this purchase process will have a direct influence on the satisfaction with other stages, especially when different aspects of the purchase process occur sequentially.

That is, people are more likely to perceive subsequent purchase stages consistent with their initial judgment and any positive or negative affect that occurs during one purchase stage likely will carry over to the next stage.

Price fairness

Recent research efforts have isolated several factors that influence consumers’ price unfairness perceptions as well as potential consequences of these perceptions (Bolton et al., 2003; Campbell, 1999; Vaidyanathan and Aggarwal, 2003;

Xia et al., 2004). Previous research has distinguished distributive fairness and procedural fairness. The principle of distributive fairness, or fairness of outcomes, maintains that individuals judge the fairness of a relationship based upon the allocation of rewards resulting from their contributions to the relationship (Homans, 1961). Thus, unequal ratios of profits to investments between all parties involved in an exchange relationship create perceptions of unfairness.

Procedural fairness concerns judgments whether processes are based on prevailing norms and behaviors (Thibaut and Walker, 1975). We propose that consumers’ price fairness perceptions are influenced by both procedural and distributive considerations. For example, a dealer’s price offer for an automobile may be accompanied with an explanation of the prices of various options and delivery charges, as well as required down payment and financing arrangements. In such situations, both the initial price of the car quoted by the sales person (i.e., price offer) and the terms associated with the price and how these terms are handled and explained to the consumer (i.e. price procedure) will influence consumers’ fairness perceptions. Also, price offer fairness perceptions and price procedural fairness perceptions are positively correlated. The order of influence will be determined by the sequence in which consumers receive the price offer and the price procedural information (van den Bos et al., 1997).

Another foundation of price fairness perceptions, the principle of dual entitlement, suggests that one party should not benefit by causing a loss to another party. When a firm uses higher consumer demand to its own advantage by increasing prices, consumers will feel being exploited and hence perceive the prices as unfair. For example, one study showed that 82 percent of the respondents judged a price increase for snow shovels the morning after a snowstorm to be unfair, while only 21 percent of respondents viewed an increase in grocery prices following an increase in wholesale prices as being unfair (Kahnemanet al., 1986). While the dual entitlement principle originated from buyers’ reactions toward sellers’ obvious exploitation based on supply and demand changes, it is possible that consumers may develop perceptions of unfairness based on their own demand situations even without explicit exploitation actions from the seller. For example, when buyers feel that they have to buy a product and must bear whatever the price is, they may be concerned that potentially they could be exploited by the seller regardless whether the seller actually performs such actions.

Relationship of fairness perceptions to satisfaction Recent research in marketing and psychology has shown that satisfaction is positively correlated with fairness perceptions (Bowman and Narayandas, 2001; Huffman and Cain, 2001;

Kim and Mauborgne, 1996; Ord?n˜ ezet al., 2000; Smithet al., 1999). Oliver and Swan (1989a, b) found that customers’

fairness perceptions depended on a supplier’s commitment and the quality of the goods and services relative to the price paid. Therefore, we propose that price perceptions influence

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consumers’ overall satisfaction judgments directly and indirectly through price fairness perceptions.

In summary, there are various components of fairness perceptions and satisfaction judgments. The components of fairness perceptions are correlated with each other. And, the components of satisfaction are also correlated with each other.

In any specific purchase process, the direction of influence between the components of price fairness depends on the order in which the information about price and terms of the offer is received by the buyers. Similarly, the direction of influence between the components of satisfaction depends on the sequence of the purchase process. In addition, specific factors that influence these constructs such as price fairness perceptions likely vary depending on the specific purchase context. Next, we develop specific testable hypotheses for these relationships within an automobile purchase context.

Research context

Buying a car was chosen for the study context for several reasons. First, buying a new car is an important decision for most consumers. Consumers’ perceived risk and uncertainty are likely to be relatively high. Prior research suggests that, when faced with performance or quality uncertainty, consumers are more likely to use price as a cue in forming performance expectations (Urbanyet al., 1997). In addition, relatively high product prices enhance the likelihood that perceived price fairness may be an important issue. Therefore, this context provides us with an opportunity to examine the influence of price fairness perceptions on satisfaction judgments. Second, an automobile purchase is a complex process, involving price negotiation, interaction with service people, selection of different option packages for the car, signing a purchase contract, as well as the car delivery process.

The purchase process usually is made up of a sequence of clearly distinguishable individual episodes typically occurring in a similar order for most auto buyers. These different events provide an opportunity to separate consumers’ satisfactions with different encounters within the entire purchase transaction procedure.

We first conducted 50 informal interviews with prospective auto buyers as well as staff at several auto dealerships in Germany to understand the automobile purchase process.

Based on these interviews, we developed a set of factors that influence price fairness perceptions as well as specific components within the purchase process that affect satisfaction judgments. Moreover, these interviews also enabled us to specify the direction of influences among the fairness components and the satisfaction components based on the temporal sequence of the purchase process, leading to the conceptual model (see Figure 1) that was tested empirically.

Hypotheses

In the model, we focus initially on the influence of consumers’

perceptions of price and price fairness on their satisfaction judgments. First, we propose that perceptions of the product’s price have both a direct influence on satisfaction judgments as well as an indirect influence through price fairness perceptions. As previous research suggests, people form price fairness perceptions from both the offer and the procedure that lead to the offer. Hence, we consider

consumers’ fairness perceptions for both the initial price offered and the various conditions and terms that are attached to the final price (i.e. procedure).

Effects of price perceptions and price fairness

Our interviews showed that car buyers indeed consider price an important factor in their purchase decisions. Specifically, consumers tend to consider the relative relationship between price and their expectations about the performance of the product they want to purchase (Vosset al., 1998). Hence, an initial price quote from the seller may be compared with a buyer’s previous experience or an expectation of an acceptable or fair price for the product. If buyers’ perceptions of performance or quality of the car exceed their expectations and the car represents good value for money, then their perceptions of the quoted or listed price should be favorable (Vosset al., 1998). Consequently, if buyers perceive that the benefits offered by the product relative to the perceived sacrifice (i.e. price to be paid) is favorable, then they will be more likely to perceive that the price is fair (Monroe, 2003):

H1. Buyers’ price perceptions positively influence their perceptions of the fairness of price offers.

In our interviews consumers frequently talked about their need for the car such as whether they can wait or they have a very short span of time to get the car. For example, their previous car may have broken down or they had an accident and needed to get a new car quickly. Consumers have some common knowledge that in a market economy prices are subject to variations in supply and demand. When demand increases relative to supply, sellers have an opportunity to raise prices and increase their profits. Therefore, when consumers need to purchase a car quickly and have few or no other options, they may feel more vulnerable due to the fear that the seller will take advantage of this opportunity to quote a higher price than in other situations regardless whether the seller actually takes such an action. The dual entitlement principle implies that such situations do influence buyers’

price fairness perceptions, especially when buyers have no other alternatives (Kahnemanet al., 1986; Kalapurakalet al., 1991). These initial interviews also revealed that the car buyers indicated they felt some anxiety at the initial stages of the buying process. Regardless of previous purchase experience, they felt some concern that they would not know whether the price would be reasonable for their situation. Hence, we propose that consumers’ feeling of vulnerability may contribute to their perceptions of price unfairness:

H2. As consumers’ perceived vulnerability due to an urgent need and their immediate demand increases, their perceptions of price offer fairness will decrease,ceteris paribus.

In terms of the influence between the two components of distributive and procedural fairness, we found that when buying an automobile, buyers typically receive an initial price offer from the dealer before they discuss specific options that they want and negotiate the final price and financial terms with the seller. The principles of distributive and procedural fairness suggest that price fairness judgments will be based on both the outcome (i.e. price) as well as information related to how the specific outcome was determined (i.e. procedure).

Information on outcomes and procedures may interact and the order that the information is received influences

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perceptions of price fairness. Hence, for a typical car purchase process in Germany, we hypothesize an influence from perceived initial price offer fairness to perceived price procedure fairness:

H3. Buyers’ perceptions of price offer fairness will have a positive effect on their perceptions of pricing procedure fairness.

We propose that fairness and satisfaction are linked through product or service price. Previous research on satisfaction indicates that equity (e.g. perception of price fairness) has a major influence on satisfaction judgments. Since Szymanski and Henard (2001) have shown that equity has a dominant effect on satisfaction judgments we propose the direction of influence to be from price fairness to satisfaction:

H4. Buyers’ perceptions of price offer fairness will have a positive effect on their overall satisfaction with the purchase.

H5. Buyers’ perceptions of pricing procedure fairness will have a positive effect on their overall satisfaction with the purchase.

In addition to influencing satisfaction judgments through fairness perceptions, price perceptions also directly influence satisfaction judgments (Vosset al., 1998). That is, consumers may also judge the price paid relative to the consistency of the performance of the product or service. When consumers compare their perceived gains or benefits of the transaction relative to their perceived monetary sacrifice and judge that their sacrifice is greater than the benefits derived from the product’s performance, consumers may be dissatisfied (Sprenget al., 1993):

H6. Buyers’ price perceptions will have a positive effect on their overall satisfaction with the purchase.

Effects of different components of satisfaction

For a complex purchase situation, the overall judgment of satisfaction consists of various components including both satisfaction with the purchase process and satisfaction with the outcome. The interviews indicated that a major aspect of purchasing an automobile involves interactions with salespeople and other members of the dealer’s staff.

Consumers rely on salespeople for specific information about the car to help them make an assessment. There are also opportunities to interact with individuals who handle the financial aspects of the purchase. Therefore, interaction with members of the dealer’s staff will have a direct influence on customer’s overall satisfaction judgments. Further, although buyers may have some general ideas about the quality of the car they are purchasing, product conditions upon delivery provide a direct opportunity for buyers to assess the quality of the car that they are actually buying (i.e. satisfaction with the outcome). Hence, satisfaction with the condition of the car upon delivery will have a positive effect on overall satisfaction judgments:

H7. Buyers’ satisfaction with the dealer’s service will have a positive effect on their overall satisfaction with the purchase.

H8. Buyer’s satisfaction with the condition of the car upon delivery will have a positive effect on their overall satisfaction with the purchase.

We propose that satisfaction with one stage of the purchase process will have a positive influence on the satisfaction with other stages, especially when the purchase process occurs in a sequence. Within the car buying process, the initial information that buyers obtain is usually a price quote.

Then they learn more about the pricing procedure. Next, they Figure 1The conceptual model

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may develop some further impressions about the dealer based on their interactions with the dealer’s service people. Finally, they complete the transaction and obtain the car. This purchase sequence determines the direction of influence from one component of satisfaction to another.

We have hypothesized that perceptions of initial price offer fairness have a positive effect on pricing procedure fairness.

Obtaining information on pricing procedures and terms associated with a price quote is part of the interactions between the customers and the dealer’s employees. Therefore, consistent with the purchase sequence, we propose that:

H9. Buyers’ perceptions of pricing procedure fairness will have a positive effect on their satisfaction with the dealer’s service.

H10. Buyers’ satisfaction with the dealer’s service will have a positive effect on their satisfaction with the conditions of the car upon delivery.

The study Pretest

To start the actual study, 100 car owners who recently had bought a car from one of the dealerships of each of the five major German car brands (DaimlerChrysler, BMW, Volkswagen, Ford, Opel/GM) were interviewed by well-trained interviewers and averaged 30 minutes. Based on these interviews we refined our set of measurement items, compiling a list of 27 items to measure the constructs. The pretest also revealed that car buying is a highly involving task for consumers. Overall, the respondents were familiar with the car buying process and had some general knowledge about purchasing a car.

Final survey

After developing the measures, we obtained a list of customers who recently had bought a car from the dealerships. We contacted 460 customers both via mail and subsequent phone calls to solicit participation. Although no incentives were offered, 246 customers agreed to participate for a completion rate of 53.5 percent. A time was scheduled with each participant and the survey was administered face-to-face at the dealerships. Well-trained interviewers from a market research company administered the survey. To help respondents refresh their memories of their purchase experiences, the interviews followed the purchase sequence uncovered during the initial set of interviews that led to the model in Figure 1. Each session lasted about 30 minutes. The demographic characteristics of the buyers and distribution of the brand/model of cars purchased matched that of the New Car Buyer Study (Table I).

Measures

As summarized below, the respondents answered questions regarding their purchase experiences using seven-point scales ranging from “strongly disagree” to “strongly agree.” To select the final items for each construct, we used Cronbach’s alpha, item-to-total correlations, and exploratory factor analysis.

Exploratory factor analysis indicated that the measures loaded on the correct factors and provided initial assessments of the discriminant and convergent validities of the measures. The final 20 items used are given in Table II and the construct correlation matrix is in Table III. As shown in Table III, 20 of the 21 inter-construct correlations are less than 0.50 and one

is exactly 0.50, providing strong evidence of discriminant validity. Overall, the measures displayed very good convergent and discriminant validities.

Perceived vulnerability

Buyers are more likely to perceive a price is unfair when they feel vulnerable to possible exploitation by a seller. This vulnerability is more severe when buyers’ need for the product or service is urgent and they are limited by the availability of other alternatives. Using items from Cook and Emerson’s (1978) “feeling of vulnerability,” respondents were asked whether the car was absolutely required, and whether there were other transportation alternatives.

Price perceptions

We argue that buyers’ perceptions of a price are based on the relativity of price and the perceived performance or quality of the product as well as their comparisons with their expectations (Monroe, 2003; Voss et al., 1998). When buyers perceive the quality or performance is consistent with the price, their perceptions of the price will be favorable, enhancing a fair price perception. Similarly, when a price offer meets one’s expectation, the evaluation is likely to be positive.

Table I Socio-demographic structure of the respondents

NCBS Sample

(%) (%)

Gender

Male 76.3 75.2

Female 23.4 24.8

Age

<25 5.6 6.1

23-49 55.8 56.1

50-65 29.3 29.3

>66 7.5 8.5

Marital status

Single or living alone 17.8 18.7

Married or living together 82.2 81.3

Persons living in house

1 12.4 12.2

2 40.2 40.6

3 21.5 21.8

4 18.8 17.9

>5 7.1 7.3

Education level

Elementary school 8.5 7.7

Middle school 28.0 28.1

High school 32.5 30.9

College 8.4 9.7

University 22.7 23.6

Residence

City 27.0 26.8

Town 40.7 41.9

Village 24.0 24.0

Country 8.3 7.3

Note:The demographic structure of the study corresponds with the new car buyer study (NCBS) (German)

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Therefore, price perceptions were measured using: the price of the new car is appropriate relative to its performance; the price of the new car meets my expectations; and the car is good value for money comparing to other cars.

Perceived price offer fairness

Since our research is in the specific context of automobile purchases, we developed our own price offer fairness measures drawing on literature sources related to procedural fairness. We emphasized equality of treatment across buyers (Xiaet al., 2004), the degree that buyers understood how the

price offer was determined (Kim and Mauborgne, 1996), and the responding buyers’ perceptions of the relationship between their needs and the price quoted by the dealer (Oliver and Swan, 1989b). The German word gerecht meaning fair and just was used to measure fairness perceptions. Also, research indicates that a cost-based pricing strategy is perceived to be fairer (Kalapurakal et al., 1991). Therefore, perceived price offer fairness was measured using: the price offer of the dealer is understandable; all customers are treated equally by the dealer; the price of this Table II Scale items and measurement properties

Scale items by construct t-value

Item reliability

Construct reliability

Variance

extracted Alpha

Price perception 0.55 0.80 0.80

The price of the new car is appropriate relative to its performance 22.53 0.53

The price of the new car meets my expectations 24.28 0.69

The price of the new car is good value for money comparing to other cars 22.12 0.49

Buyer vulnerability 0.71 0.86 r¼0:71

The car is absolutely required for private or business use 19.21 0.79 It is not possible for me to use other means of transportation 19.32 0.64

Price offer fairness 0.51 0.84 0.95

The price of the new car of this dealer is clear understandable) 16.24 0.57 All customers are treated equally by the dealer’s pricing 22.08 0.45

I think the price of this dealer is based on cost 15.34 0.43

The price of the car is independent of customer’s needs 15.23 0.60

Pricing procedure fairness 0.30 0.79 r¼0:85

The terms of this dealer are fair 20.25 0.34

The procedure of buying the car from the dealer is fair 9.07 0.26

Satisfaction with the dealer’s service 0.57 0.78 0.93

The dealer’s employees are friendly 19.21 0.67

The dealer offers a lot of accessories 15.79 0.60

I am satisfied with the information that was provided by the employees 14.95 0.54

I am satisfied with the dealer’s commitment 15.16 0.51

Satisfaction with the car upon delivery 0.53 0.78 0.77

The car was in perfect condition when it was delivered 9.32 0.50

All option requests were fulfilled 14.57 0.67

The car is the same as my expectations 9.01 0.44

Satisfaction with the purchase 0.56 0.86 r¼0:55

I am satisfied with the car purchase 14.43 0.68

There is no reason to complain 12.36 0.45

Table III Construct and inter-construct correlations

Price perception

Buyer vulnerability

Price offer fairness

Price procedure

fairness

Satisfaction with dealer’s service

Satisfaction with car

Satisfaction with purchase

Price perception 0.57

Buyer vulnerability 0.35 0.71

Price offer fairness 0.32 0.23 0.76

Price procedure fairness 0.44 0.37 0.14 0.85

Satisfaction with dealer’s service 0.26 0.23 0.24 0.14 0.68

Satisfaction with car 0.23 0.24 0.20 0.20 0.12 0.53

Satisfaction with purchase 0.40 0.38 0.46 0.37 0.50 0.34 0.55

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dealer is based on cost; and the price of the car is not affected by the individual customer’s needs.

Pricing procedure fairness

Research on procedural fairness suggests that the procedure of setting the price, in addition to the price itself would influence buyers’ fairness perceptions. For a car purchase, a price is a combination of several elements and carries with it various terms and conditions. Therefore, how these terms and the price setting procedures were explained to and accepted by the buyers were measured using two items: the terms of the dealer are fair; and the procedure of buying a car from the deal was fair.

Satisfaction with the dealer’s service

The measures used for this construct were based on the various interactions that the buyers had with the dealer including the friendliness of the staff, the impression obtained when purchasing accessories, satisfaction with the information provided by the dealer, and satisfaction with the dealer’s general commitment (Burmann, 1991; Ostrom and Sprenget al., 1996).

Satisfaction with the car upon delivery

This aspect of satisfaction was measured by obtaining buyers’

perceptions of the car relative to their expectations, the condition of the car when it was delivered, and whether all options or features of the car that the buyers requested had been met.

Overall satisfaction

Two items were used for this construct: overall satisfaction with the purchase and intention to complain.

Measurement properties of the scales

Using exploratory and confirmatory factor analyses, the measurement model was assessed for the dimensionality of the scales, their reliability and the construct validity of the measures. Item reliability, construct reliability, and variance extracted of the items are shown in Table II. A single-factor confirmatory factor analysis (WLS estimate) was conducted to further check scale reliability and validity. The confirmatory assessment of the measurement properties of all four scales with at least three items indicated that the confirmatory factor loadings (lambdas) were high and significant (p,0:001), satisfying the criteria for convergent validity. Moreover, Cronbach’s alpha for these four scales was 0.77 or higher, indicating adequate reliability.

Except for perceived price offer fairness, all construct reliabilities were greater than 0.50. The variances extracted were greater than 0.75. These two assessments exceed the established minimum criteria (Fornell and Larcker, 1981). All t-values shown in Table II were statistically significant, providing evidence of convergent validity of the measures (Fornellet al., 1982). The M²measure developed by Fornell et al.(1982) had a value of 0.46 which is above the required threshold of 0.40. All inter-construct correlations were 0.50 or less, indicating the measures had discriminant validity. The squared correlation coefficients of each latent variable with relevant others was smaller than the average variance recorded in 31 of 42 possible comparisons, providing more evidence of discriminant validity.

Evaluating the structural model

The structural model (Figure 2) was tested using LISREL 8.3 (Jo¨ reskog and So¨rbom, 1996). PRELIS was used to generate the input matrix. Analysis was conducted separately for an exogenous model that included the exogenous constructs and their indicators and an (endogenous model that included the endogenous constructs and their indicators). To test the absolute fit of each of these two models, the goodness of fit index (GFI) was 0.99 (0.98) and the adjusted goodness of fit index (AGFI) was 0.98 (0.96). Thus, the goodness of fit indices were well above the minimum criterion values of 0.90.

For the full model, the root mean square error of approximation (RMSEA) was 0.043 for both models, which is below the recommended upper threshold of 0.08. These indices clearly indicate a good absolute fit to the data (Jo¨ reskog and So¨rbom, 1996).

Testing the comparative fit of the two models, the normed fit index (NFI) (Bentler and Bonett, 1980) was 0.98 (0.97), also exceeding the suggested criterion value of 0.90. The comparative fit index (CFI) of 0.99 (0.99) exceeded the criterion value of 0.90 (Bentler, 1990). The incremental fit index (IFI) was 0.98 (0.97), again indicating a good fit.

Alternative model configurations were considered, but as these indices indicate, improvements in fit could not be obtained by any alternative configurations.

Test of the hypotheses

The standardized estimates for the various model paths for the study are shown in Table IV along with the results of the hypotheses tests according to the sequence of paths depicted in Figure 2. As hypothesized, respondents’ perceptions of price offer fairness were positively influenced by their price perceptions (b¼0:64,t¼14:62,p¼0:04, supportingH1), and negatively influenced by their perceived vulnerability (b¼20:21, t¼4:63, p¼0:05, supporting H2). When buyers perceive that the price offer is consistent with or exceeds their expectations about the car’s perceived quality or performance, they are more likely to perceive the price offer as fair. Further, an increase in buyers’ need and demand enhances a feeling of vulnerability, which, ceteris paribus, increased their concern as to whether the price offered by the dealer was fair, producing a negative effect. Thus, our results complement past research results (Kahneman et al., 1986;

Maxwell, 1995). Moreover, price perceptions also exerted a small direct influence on overall satisfaction with the purchase (b¼0:15,t¼1:95,p¼0:09). We also ran the model without the direct effect of price perceptions and compared it with the hypothesized model. The difference was significant (x²¼66:97, p,0:01) so we kept the path. The combined direct and indirect effect of price perceptions on overall satisfaction with the purchase is 0.48. Thus, these results support our argument that price perceptions have a major influence on overall customer satisfaction (see also Singh and Sirdeshmukh, 2000; Vosset al., 1998).

We hypothesized (H3) that perceived price offer fairness has a positive effect on perceived pricing procedure fairness since car buyers are more likely to obtain an initial price offer before a final price is negotiated. The initial perceptions of the fairness of the offer are likely to influence perceptions of price procedure fairness (van den Bos et al., 1997). This relationship was supported (b¼0:89,t¼17:78,p¼0:05).

Regarding the relationship between fairness and satisfaction, we hypothesized that perceived price offer

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fairness (H4) and perceived pricing procedure fairness (H5) have positive effects on buyers’ overall satisfaction judgments.

These propositions are supported by a direct effect of price offer fairness (b¼0:22,t¼2:53,p¼0:04) and a direct effect of pricing procedure fairness (b¼0:32,t¼2:56, p¼0:05).

The combined effect of price offer fairness perceptions on overall satisfaction judgments, including the direct effect and the indirect effect through price procedure fairness, is 0.77.

The results indicated that both satisfaction with the dealer’s service (b¼0:36, t¼4:06, p¼0:09, H7) and satisfaction with the conditions of the car upon delivery (b¼0:30, t¼5:02, p¼0:06, H8) positively influence overall satisfaction. Also, buyers’ perceptions of pricing procedure fairness positively influenced the respondents’ satisfaction with the dealer’s service (b¼0:61,t¼10:3, p¼0:06, H9).

Finally, satisfaction with the dealer’s service had a positive effect on satisfaction with the condition of the car upon delivery (b¼0:44, t¼12:97, p¼0:03, H10). Overall, the results indicate that buyers’ satisfaction with an automobile purchase is influenced by their price fairness perceptions as well as their satisfaction with various transactions that occur during their purchase process.

Discussion

Our research contributes to the literature on satisfaction by incorporating the role of perceived price fairness. Price is an important element in consumers’ purchases; therefore it has a large influence on consumers’ satisfaction judgments. The results showed that price perceptions directly influence satisfaction judgments as well as indirectly through Figure 2Effects of price fairness on customer satisfaction

Table IV Testing the model (Figure 2) relationships

From To Sign Standardized relationship estimate t-value p-value

Perceived vulnerability Price offer fairness 2 20.21 4.63 0.05

Price perceptions Price offer fairness þ 0.64 14.62 0.04

Price offer fairness Pricing procedure fairness þ 0.89 17.78 0.05

Pricing procedure fairness Satisfaction with dealer’s service þ 0.61 10.30 0.06

Satisfaction with dealer’s service Satisfaction with car þ 0.44 12.97 0.03

Satisfaction with car Satisfaction with purchase þ 0.30 5.02 0.06

Price perceptions Satisfaction with purchase þ 0.15 1.95 0.09

Price offer fairness Satisfaction with purchase þ 0.22 2.53 0.04

Pricing procedure fairness Satisfaction with purchase þ 0.32 2.56 0.05

Satisfaction with dealer’s service Satisfaction with purchase þ 0.36 4.06 0.09

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perceptions of price fairness. Our research has linked these two important concepts and demonstrated the influence of perceived price fairness on satisfaction judgments empirically.

Further, we have extended research relative to the influence of demand-supply relationships on price fairness perceptions by examining the demand side perceptions (i.e., consumer vulnerability) without actual supply side actions. Results indicate that consumers’ perceived vulnerability, which is induced by a perceived urgency of need by the consumers, had a negative effect on perceived price offer fairness. The results extend the dual entitlement principle and imply that sellers should not only avoid exploiting their customers but should also anticipate consumers’ potential feelings of being exploited. Being sensitive to the buyers’ psychological state and assuring buyers of fair treatment will enhance perceptions of price fairness without changing the price offer. When buyers are relaxed relative to their feelings of vulnerability, price fairness perceptions will be higher, thereby enhancing satisfaction judgments.

However, we did not measure respondents’ prior relationship with the dealerships. Presumably, a good existing relationship with the dealerships may serve as a

“safety net” that consumers may use to reduce their feelings of vulnerability. In addition, the felt vulnerability within our study context may also be due to the respondents’ high involvement with the purchase. Hence, future research should examine when consumer vulnerability would occur as well as its impact on perceptions of fairness and satisfaction across different levels of prior experience or relationship with the seller. By manipulating vulnerability and prior experience with the seller, we might expect that the effects of vulnerability on price perceptions would be attenuated when the prior relationship with the dealer is satisfactory (Homburg et al., 2005). Conversely, when perceived vulnerability is high and the buyer has no prior experience with the dealer, the negative effects on price perceptions we observed in this study would be more substantial. Results from such future research would offer additional guidelines for sellers to anticipate and handle consumer vulnerability.

Second, both the price offer and the procedure used to develop a price are important in influencing satisfaction judgments. In complex purchases such as an automobile, consumers need to understand the procedure for setting the price and terms and conditions related to a price in order to make a judgment about the price offered. Therefore, explaining this procedure and offering such information to consumers will enhance the transparency of the price and perceived fairness, further positively influencing satisfaction judgments. This price transparency may be particularly relevant when prices are increased or when the price structure is relatively complex. When a seller explains how a price is derived and shows that price increases are due to uncontrollable external factors such as an increase in raw material prices, the buyer is more likely to accept the price increase and perceive it fair or at least as less unfair (Vaidyanathan and Aggarwal, 2003; Xiaet al., 2004).

Third, consistent with previous research, we showed that overall judgments of satisfaction are influenced by consumers’

satisfaction with various stages in a purchase process. In the context of automobile purchases, overall judgments of satisfaction were determined by satisfaction with the dealer’s service and satisfaction with the conditions of the product upon delivery in addition to perceptions of price fairness.

These elements are correlated but distinct components of overall satisfaction judgments. By partitioning satisfaction into several distinct components, sellers can determine which component influences satisfaction at the various stages of the purchase process. Hence, a better understanding of consumers’ satisfaction formation will increase our knowledge of how to enhance consumers’ satisfaction.

This research linking perceived price fairness and customer satisfaction was examined in an automobile purchase context.

Nevertheless, we believe the results reported in this article can be generalized to other consumer purchases of relatively high- priced products and complex purchase processes involving multiple interactions with the sellers’ employees. However, whether and how the relationship between price fairness and customer satisfaction extends to other product and service purchase contexts needs to be examined. Further, as we suggested, the direction of influence among the components of fairness perceptions and satisfaction judgments depends on the sequence of interactions within the purchase process and the order that consumers receive relevant information. Hence, another area needing additional research is when consumers first receive information about the pricing procedure as well as the price offer itself.

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