When 3 Price Components Are Fairer Than 2 or 4: Consumers’ Reactions to Price Increases in Tariff Schemes

Companies in diverse business fields struggle with the impact of regulatory interferences with serious consequences on cost and pricing structures. For instance, branch specific minimum wages, tax increases (e.g., alcoholic drinks, cigarettes, and gasoline), or defining new production rules (e.g., statutes regarding the proportion of conventional and renewable energy production) constitute only a small sample of political options to intervene in economic systems. As a result, price increases are often inevitable and concerned companies’ pricing structure is no longer determined by their pricing strategy solely. However, although companies become externally restrained regarding costs and prices, they are typically still free to decide on the type of communication and presentation of price increases.

The purpose of this paper is to improve the knowledge of the impact of different types of establishing price increases in tariff pricing schemes on perceptions of price fairness and switching intentions. Findings of three experiments reveal that a separated price increase (i.e. adding a price component into the existing tariff structure that bears the total price increase) results in less unfavorable consequences than an embedded price increase (i.e. spreading the price increase across existing price components). However, these effects revert with an increasing number of additional price components.

This research’s findings supply important implications for a more efficient handling of externally imposed price increases in tariff pricing. First, firms can minimize unfavorable consumers’ reactions to increased prices by using a separate price component that incorporates the total price increase. Second, this type of price increase is particularly advisable if the level of a price increase is relatively high. Third, as this positive impact is attached to the numbers of additional price components, firms should realize price increases over a minimum of separate price components.