Journal of Business Research 56 (2003) 453 – 463

Who is the fairest of them all? An attributional approach to

price fairness perceptions
Rajiv Vaidyanathan, Praveen Aggarwal*
Department of Marketing, University of Minnesota-Duluth, 10 University Drive, Duluth, MN 55812-2496, USA
Received in revised form 10 October 2000; accepted 14 February 2001

Abstract

We use attribution theory to understand consumers’ perceptions of fairness of price increases. Using the dual entitlement (DE) principle,
researchers in the past have suggested that price increases will be perceived as fairer if they are cost-justified. In this study, we empirically
demonstrate that this is not universally true. We conduct three experiments to examine the fairness perception on two attributional dimensions
— locus of cause and controllability. We find empirical evidence to conclude that even cost-justified price increases can be perceived as less
fair when the locus of causality is internal to the seller and/or when the price increase is within the volitional control of the seller. For
example, when competitors’ prices stay the same or when the cost increase is directly attributable to the seller’s actions, even cost-justified
price increases are seen as less fair. Implications of these findings for managers and policymakers are discussed.
D 2003 Elsevier Science Inc. All rights reserved.

Keywords: Price fairness; Dual entitlement principle; Attribution theory

1. Introduction
Of the four ‘‘P’s’’ of marketing, only pricing brings in
revenue for an organization. Its strategic importance to an
organization cannot be overstated. There are two major
dimensions of the pricing decision — economic and psy-
chological. Economic theory takes into account factors such
as ingredient costs, overheads, target ROI, and the demand
and supply conditions within an industry. Despite its math-
ematical elegance, the economic theory falls short when
applied to real-life situations. For example, based on the
simple demand– supply relationship, one would argue that
as goods become scarcer, prices should go up. Even though
suppliers can increase their prices in the short run, often,
they do not. Examples often cited are those of major sports
events organizers, airlines, and restaurants, which do not
increase prices even in the face of demand that far exceeds
supply (Withiam, 1994). This is where the psychological
dimension of pricing becomes relevant. An important aspect
of pricing is how consumers perceive a price or a price
change. Very often, based on price, consumers form judg-
* Corresponding author. Tel.: +1-218-726-8971; fax: +1-218-726-
7578.
E-mail address: paggarwa@d.umn.edu (P. Aggarwal).
ments about quality (Monroe, 1973) and fairness (Hunt and
Nevin, 1981). Thus, even though from an economic stand-
point a manufacturer could charge more to clear excess
demand, consumers may not deem this action to be fair.
Manufacturers would not like to be perceived as being
unfair for the fear of reprisal from consumers (Okun,
1981) and out of concerns about damaging consumer trust
and goodwill (Arrow, 1973). It is this potential of psycho-
logical reaction that prevents manufacturers from profiting
from such short-term market opportunities that economic
theory would otherwise predict.
So, how do consumers react to price increases? Do
consumers perceive all price increases unfair? In this study,
we examine conditions in which a price increase may not
be considered unfair. We first briefly review literature on
the dual entitlement (DE) principle, which explains how
consumers evaluate the fairness of a price. Attribution
theory is then introduced to delineate conditions under
which the DE principle may not hold. We then report
results of three studies that empirically test hypotheses
related to fairness perceptions. Also, note that we are
focusing only on price increases in this study and are
examining whether consumers perceive them as unfair or
fair under certain conditions. Thus, although the distinction
between whether consumers perceive something as desir-

0148-2963/03/$ – see front matter D 2003 Elsevier Science Inc. All rights reserved.
doi:10.1016/S 0 1 4 8 - 2 9 6 3 ( 0 1 ) 0 0 2 3 1 - 4
454 R. Vaidyanathan, P. Aggarwal / Journal of Business Research 56 (2003) 453–463
able/undesirable vs. fair/unfair is important, our study
focuses on the issue of perceived fairness. Assuming
constant quality, it is reasonable to assume that consumers
perceive all price increases as being undesirable. However,
an undesirable price increase may be seen as fair or unfair.
Also, we conceptualize fairness and unfairness to be the
opposite ends of the same continuum. Thus, we shall use
the terms ‘‘more unfair’’ and ‘‘less fair’’ interchangeably.
2. DE principle and fairness perception
Consider the following two scenarios:
Suppose that, due to a transportation mix-up, there is a
local shortage of lettuce and the wholesale price has
increased. A local grocer has bought the usual quantity
of lettuce at a price that is 30 cents per head higher than
normal. The grocer raises the price of lettuce to
customers by 30 cents per head.
A severe shortage of Red Delicious apples has developed
in a community and none of the grocery stores or
produce markets have any of this type of apples on their
shelves. Other varieties of apples are plentiful in all of
the stores. One grocer receives a shipment of Red
Delicious apples at the regular wholesale cost and raises
the retail price of these Red Delicious apples by 25%
over the regular price.
These scenarios, taken from Kahneman et al. (1986a, pp.
732 –734), illustrate the DE principle. An overwhelming
majority of respondents in their study rated the first scenario
as ‘‘fair’’ and the second as ‘‘unfair.’’ According to Kahne-
man et al., consumers have ‘‘community norms’’ of fair
behavior. Both the seller and the buyer are entitled to a
‘‘normal’’ profit and price, respectively. This norm is
established in relation to a ‘‘reference’’ transaction, typically
the most recent or an average transaction. Thus, the first
scenario was considered fair as the grocer was entitled to its
fair profit. The second scenario was considered unfair
because the consumer was entitled to his/her fair price,
which was not offered. It is also interesting to note that in
case of conflict, seller’s entitlement takes precedence over
buyer’s entitlement. This was the primary reason why the
first scenario was judged fair despite the fact that the buyer
had to pay more.
One of the important conclusions of the DE principle is
that cost-justified price increases are perceived to be fair.
The DE principle has received some empirical support in the
marketing literature (cf. Urbany et al., 1989), with important
contextual qualifiers added for framing effects (see, e.g.,
Kalapurakal et al., 1991). Still, DE’s basic premise that cost-
justified price increases are perceived fair has not been
questioned. Also, little theoretical justification has been
offered in support of the Principle. In Section 3, we first
provide a theoretical grounding for the DE principle using
attribution theory. We then use this theoretical framework to
propose conditions under which the Principle will not hold.
3. Attribution theory and DE
According to attribution theory, people attempt to make
causal inferences about observed actions and these causal
inferences influence their responses. In a marketing context,
attribution theory has been used to explain a variety of
consumer behaviors, including responses to product endors-
ers, participation in research surveys, and self-perception
and choice decisions (see Folkes, 1988 for a review). The
focus of this paper is on the consequences of causal
ascriptions. One enduring model of the consequences of
causal attributions is presented by Weiner (1992). This
model was successfully used to explain consumer responses
to product failures (Folkes, 1984) and offers an excellent
categorization schema for the causal inferences made by
consumers about an observed price increase.
Weiner’s (1992) categorization scheme classifies causes
on the basis of three dimensions: locus of causality, con-
trollability, and temporal stability. Locus refers to whether
the cause of an action is ‘‘internal’’ to the actor or
‘‘external.’’ For example, if a product breaks down, the
cause will be internal to the consumer if she did not use the
product in the prescribed fashion. The cause will be external
if the manufacturer sold a defective piece. Thus, locus is
determined based on who is responsible for a given action.
Controllability, on the other hand, is based on whether
an action was in volitional control of an actor or not. In
other words, an action is considered volitional or control-
lable if it was perceived to be undertaken as a willful
choice. If an action was unavoidable or was a constraint,
then it is likely to be perceived as uncontrollable. For
example, if a manufacturer raises its prices when there
are no cost-based reasons to do so and every other com-
petitor in the market continues to sell at the old lower price,
buyers are likely to infer that the price increase was within
the volitional control of the seller. On the other hand, a
price increase is likely to be perceived by consumers to be
uncontrollable if the product in question is imported from a
country whose currency has suddenly become more
expensive, thereby increasing the purchase price for the
seller. Thus, consumer perception of controllability is
determined largely by examining if the actor could have
done otherwise (Weiner, 1992).
The third causal inference is based on the temporal
stability of the cause. This refers to whether a cause remains
stable over time or is a temporary phenomenon. For
example, if a seller raises price to increase its profit margin,
the cause behind the change will be seen as more perman-
ent, whereas a raise in response to a short labor strike will be
seen as more temporary. It should be noted here that
consumers could assess an action on any or all dimensions.
For example, an action (a price increase because of hike in
minimum wages) may be seen as external, uncontrollable,
and permanent, simultaneously. Also, the three dimensions
have not been shown to be orthogonal, and we empirically
also find interaction effects in our study.
 R. Vaidyanathan, P. Aggarwal / Journal of Business Research 56 (2003) 453–463
One of the key advantages of using this schema is that
the three dimensions are linked to behavioral outcomes. For
example, Folkes (1984) has shown that if a product failure is
linked to stable attributions, consumers prefer a refund
rather than an exchange. Because of the stability of the
attribution (say, poor quality control or substandard raw
material), consumers expect the problem to be present in
the exchanged product as well and would therefore prefer
a refund so that they could buy that product from a diffe-
rent manufacturer.
We use this feature (dimensions’ link to behavioral
outcomes) of attribution theory to derive predictions for
fairness perceptions of a price increase. In this study, we
examine only two of three dimensions. We exclude temporal
stability from the scope of this study for a couple of reasons.
First, this dimension has previously been studied in the
context of the DE principle. In the context of consumer
judgments of price fairness, Kalapurakal et al. (1991)
examined the impact of temporal stability. Although they
did not specifically use the theoretical underpinning of
attribution theory to explain their findings (they phrased it
as the consistency of the seller in applying a pricing rule
over time), their results were consistent with the view that
(a) consumer judgments of fairness were influenced by
whether they expected similar outcomes to occur in the
future, and (b) consumer expectations of the recurrence of
outcomes in the future were influenced by their perceptions
of the stability of causes for an observed action. Specifically,
they found that when temporal stability of causes was taken
into account, a buffer rule or a cost-plus rule was considered
to be fairer than the DE principle. More recently, Campbell
(1999) also demonstrated that the long-term reputation of a
seller affects perception of price fairness by moderating
inferences of motive. The second reason for excluding
temporal stability was methodological. The presentation
of a longitudinal dimension in a cross-sectional study based
on experimental manipulation seemed implausible, if
not inconceivable.
Research has shown that consumers react more unfavor-
ably if the locus of causality of a negative outcome can be
linked to a firm (an internal locus of causality). Thus, for
example, Folkes (1984) found that customers expect a
refund and an apology if the product failure can be attrib-
uted to the firm. On the other hand, if the product failure is
consumer-related (did not follow usage instructions; locus
being external to the seller), no such refund or apology is
expected. Also, an internal locus is associated with a feeling
of anger towards the seller. Based on this, we would expect
that a price increase would be evaluated as less fair if the
locus of causality is perceived to be internal to the seller.
Similarly, it has been shown that controllability affects
how consumers perceive a firm’s actions. For example,
Weiner (1980) has shown that a person feels angrier when
a bad outcome can be attributed to someone’s controllable
actions. Similarly, Folkes (1984) shows that consumers feel
angry and want to hurt a firm when they attribute a product
455
failure to firm’s controllable actions. In the light of this
evidence, we would expect that consumers would evaluate a
price increase to be more unfair (or less fair) if the cause of
that increase was perceived to be within the volitional
control of the seller.
In order to understand the influence of these two dimen-
sions on consumers’ perception of fairness of a price
increase, we designed three studies. Studies 1 and 2 were
designed to examine the impact of locus of causality and
controllability, respectively, on the fairness perception of a
price increase. Studies 1 and 2 were designed as pilot
studies to replicate existing findings in the context of price
increases. Study 3 examined the main effects and interac-
tions of the two dimensions simultaneously.
3.1. Study 1
One of the earliest distinctions of causal structure was
based on the internal vs. external locus differentiation.
Beginning with the early work of Heider (1958), it was
believed that the result of an action is felt to depend on
factors within the person (internal locus) or factors within
the environment (external locus). We therefore designed
the first study primarily to understand the influence of
locus of causality on the fairness perception of a cost-
justified price increase. The objective was to examine if
customers perceive a price increase caused by a seller
(internal locus of causality) to be more (or less) fair than a
price increase driven by environmental factors (external
locus of causality). Based on arguments forwarded by
Kahneman et al. and Folkes (1984), we would expect that
customers would perceive externally driven price increases
to be fairer than those driven by internal causes. This leads
to Hypothesis 1.
Hypothesis 1: Price increases driven by external factors
will be perceived as fairer than those driven by inter-
nal factors.
3.1.1. Data
Two product categories, a nondurable grocery item (let-
tuce, a product used by both Kahneman et al., 1986b and
Kalapurakal et al., 1991) and a durable large ticket item (a
refrigerator), were chosen for this study. Scenarios were
created and categorized as either ‘‘internal locus’’ or
‘‘external locus’’ for the two product categories. A 2  2
between-subjects design was used. Internal locus of causality
was manipulated by making the seller responsible for the
price increase (e.g., as a result of an accounting oversight). In
the external locus of causality scenario, the price increase was
attributable to causes external to the seller (e.g., a market-
wide shortage of raw materials). In both cases, the price
increase was the direct result of a cost increase. Examples of
scenarios for Study 1 are included in Table 1. Participants,
136 undergraduate students at a Midwestern University, were
randomly assigned to one of the four conditions.
456 R. Vaidyanathan, P. Aggarwal / Journal of Business Research 56 (2003) 453–463
Table 1
Scenarios for Study 1: locus of causality
Internal cause (A)
Firm is responsible for price increase.
Example:
A store discovers that it is required to make a large tax
payment as a result of an accounting oversight.
As a result of this increased cost, the store decides to
increase the selling price.
3.1.2. Results
3.1.2.1. Measures and manipulation check. Based on
existing research, a three-item scale measure was developed
to assess the perception of fairness. As noted earlier, we treat
fairness and unfairness as part of the same continuum.
Subjects were given an opportunity to classify a scenario
as fair or unfair on a 3 to + 3 scale (extremely unfair –
extremely fair; extremely unacceptable – extremely accept-
able; extremely unreasonable – extremely reasonable). Sim-
ilarly, a four-item scale was developed for locus of causality
(e.g., factors leading to the price increase caused by the store
or not; those factors were internal or external to the store,
etc.). Both the scales had an acceptable Cronbach reliability
( > .80). Also, for each of the two measures, exploratory
factor analysis of the scale items returned a single-factor
solution, thereby indicating each scale’s unidimensionality.
Respondents were asked to rate the fairness of the price
increase after reading each scenario. Averaged scale meas-
ures were used for the purpose of analysis.
The mean difference on the locus of causality measure
between the two scenarios (external and internal loci of
causality) was large, in the intended direction (2.67 vs. 4.95),
and statistically significant [ F(1,135) = 73.78, P < .001],
thereby indicating that the manipulation was successful.
3.1.2.2. Fairness perception. It was hypothesized that cus-
tomers will treat a cost-based price increase to be less unfair if
the price increase was perceived to be a result of factors
external to the seller. In other words, if customers have to
make a trade-off between their own entitlement and that of the
product’s seller, they will allow the seller his/her entitlement if
the locus of causality is external to the seller. Our results
strongly support this hypothesis. For both the product cat-
egories (individually as well as jointly), the difference in
fairness perception between the two scenarios is large and in
the hypothesized direction (see Table 2). Subjects found the
price increase in the ‘‘external locus’’ scenario to be fairer than
in the ‘‘internal locus’’ scenario. In order to test the statistical
significance of these differences, a 2  2 (Locus of Causali-
ty  Product Category) ANOVA using the fairness perception
as the dependent variable revealed the desired main effect of
locus of causality [ F(1,122) = 29.60, P < .001]. The difference
in fairness perception between the two conditions was 1.54
[ F(1,119) = 9.13, P < .003]. No other effects were significant.
External cause (B)
Factors external to the firm are responsible for price increase.
Example:
There is a market-wide shortage, and the costs for all stores rise and
the stores pass this cost increase on to their customers. As a result of
the higher market price, this store decides to increase the selling price.
3.1.3. Discussion
According to the DE principle, all cost-justified price
increases are viewed as fair because it maintains the seller’s
entitlement to a fair profit. We argued that consumer
attributions of the source of the cost increase would influ-
ence the perceptions of fairness of a price increase, thus
qualifying the general tenets of the DE principle. Our results
show that even for a cost-based price increase, consumers
who view the locus of the cost increase as being internal to
the firm were not so accepting of the seller’s entitlement to
maintain a profit. The implications of this finding are that
sellers can increase the acceptability of a price increase if
they justify it not only in terms of a cost increase but also in
terms of an externally caused cost increase. A cost-justified
increase that is perceived as being caused by factors internal
to the seller will be perceived as being less fair than one
caused by factors external to the seller.
3.2. Study 2
Another dimension that was proposed to influence the
attributions made by individuals to observed actions was
controllability. In the original psychological context, a stu-
dent’s poor performance on a math test may be attributed to
lack of effort on the student’s part (internal and controllable)
or a lack of math aptitude (internal and uncontrollable).
Having examined the impact of locus of causality on the
fairness perception, the next study was designed to look into
the role of controllability in fairness assessments. In the
context of consumer evaluations of fairness, we expect a price
increase ‘‘controllable’’ to the extent the seller has voluntary
control over the decision to change the price. If a price
increase is seen by consumers as being beyond the volitional
control of a seller, they are less likely to blame the seller for the
increase and will therefore treat the price increase more
favorably. We operationalized this in terms of cost increases.
If a price increase was the direct result of an increase in the
Table 2
Mean perceived fairness: Study 1
Lettuce Refrigerator Total
Internal cause 0.280 (1.781) 0.334 (1.747) 0.307 (1.750)
External cause 1.536 (1.051) 0.881 (1.499) 1.235 (1.307)
Standard deviation in parentheses.
 R. Vaidyanathan, P. Aggarwal / Journal of Business Research 56 (2003) 453–463
Table 3
Scenarios for Study 2: controllability
Controllable (A)
Price increase is in firm’s volitional control.
Example:
Firm increases price because of a currency
exchange rate change, even though the
firm is unaffected because of a legal contract to
buy the product at the old rate.
store’s costs that was not in the store’s control, it was classified
as uncontrollable. On the other hand, if the store increased
prices simply to match price increases in the market despite no
change in the store’s actual costs, it was classified as control-
lable. This leads us to Hypothesis 2:
Hypothesis 2: Price increases driven by factors that are
perceived to be within a seller’s volitional control will be
considered less fair than those driven by factors
perceived to be outside the seller’s volitional control.
3.2.1. Data
Two scenarios were created for each of the two products
(lettuce and refrigerator). Both scenarios involved price
increases because of a change in currency exchange rates.
In one scenario, the store was unaffected by the currency rate
change (because of a legal contract to buy at the old rate),
whereas in the other, the store’s costs went up correspond-
ingly with the currency rate change (the price is increased in
direct proportion to the actual increase in cost). Examples of
scenarios used in this study are given in Table 3.
Subjects were undergraduate students at a Midwestern
University. Fifty-one students were given a brief question-
naire for the completion of which they were given course
credit. Each questionnaire contained each of the two scen-
arios — either for a nondurable product (lettuce) or a durable
(refrigerator). Subjects, in effect, saw both the scenarios (the
order of the scenarios was randomized across subjects) but
only for a single product category. This resulted in a 2  2
design where controllability was a within-subjects factor and
product category was between-subjects.
3.2.2. Results
3.2.2.1. Measures and manipulation check. Fairness was
measured using the same scale as in Study 1 (Cronbach
a=.82). Controllability was measured by a two-item scale
(whether the store could have avoided the increase and
whether it was within the volitional control of the store).
Pearson correlation for the two items was .71 ( P < .001).
Also, for each of the two measures, exploratory factor
analysis of the scale items returned a single-factor solution,
thereby indicating each scale’s unidimensionality. Averaged
scale measures were used for the purpose of analysis.
Pairwise t test indicated a strong and statistically signific-
ant difference in the perception of controllability between the
457
Uncontrollable (B)
Price increase is beyond firm’s volitional control.
Example:
Firm increases price because costs rise as a result of
a currency exchange rate change.
two scenarios. The differences were statistically significant
(5.13 vs. 3.11; t = 7.64; P < .001) for the two scenarios,
thereby indicating that the manipulation was successful.
3.2.2.2. Fairness perception. As expected, the price increase
in the scenarios where the factors were perceived as being
beyond the seller’s control was evaluated as fairer than in the
controllable situation scenarios (1.21 vs. 0.112; see Table
4). A repeated-measures ANOVA indicated that the differ-
ence between the two conditions is statistically significant
[ F(1,44) = 23.827, P < .0001]. There are no differences
across product categories [ F(1,44) = 0.129, P=.721], and
there are no interaction effects between controllability and
product categories [ F(1,44) = 0.301, P=.586]. Thus, it can be
concluded that irrespective of locus of causality (both price
increases were caused by external factors), a price increase
attributable to controllable factors is seen as less fair than one
attributable to uncontrollable factors.
3.2.3. Discussion
Using the theoretical basis of attribution theory, Study 2
attempted to show that price increases might be viewed
differently depending on the perceived controllability of the
increase. The hypothesis was fully supported. Study 1
extended the scope of the DE principle to examine the
differential impact of internally vs. externally caused cost-
justified price increases on fairness perceptions. Specifically,
it showed that a cost-justified price increase caused by factors
external to the seller would be perceived fairer than one
caused by factors internal to the seller. Study 2 shows that
all externally caused price increases are not necessarily fair.
Externally caused price increases that are perceived to be
within the volitional control of the seller are judged as less fair.
3.3. Study 3
There is little doubt that causal attributions influence
people’s affective reactions to observed outcomes. In the
Table 4
Mean perceived fairness: Study 2
Lettuce Refrigerator Total
Controllable 0.254 (1.591) 0.029 (1.798) 0.112 (1.684)
Uncontrollable 1.217 (1.343) 1.203 (1.483) 1.210 (1.399)
Standard deviation in parentheses.
458 R. Vaidyanathan, P. Aggarwal / Journal of Business Research 56 (2003) 453–463

Table 5
Scenarios for Study 3: Causal Locus  Controllability
Controllability
Controllable (costs remain unchanged) Uncontrollable (costs go up)
A B
Locus of The store’s closest competitor in a market temporarily Suppose the store discovers that a glitch in its accounting software
causality: closes for 3 months of remodeling. As a result, the store (created by a commercial firm) has resulted in underpayment of taxes.
internal decides to increase the selling price of lettuce from 30 As a result, it is required to make a large tax payment of back taxes and
(market cents per head to US$2.30 per head in response to the a fine. As a result of this increased cost (which they calculate to be about
prices expected increase in demand. Other stores continue to 30 cents per head of lettuce), the store decides to increase the selling price
remain sell lettuce at US$2.00. of the lettuce to US$2.30. Other stores continue to sell lettuce at US$2.00.
unchanged)
C D
Locus of Suppose there is a major crop failure in many areas and Suppose there is a major crop failure and the wholesalers’ price for lettuce
causality: the wholesalers’ price for lettuce for all stores rises by 30 for all stores rise by 30 cents from US$1 to US$1.30 and the stores pass this
external cents from US$1 to US$1.30 and the stores pass this cost cost increase on to their customers. As a result of the increased cost and the
(market prices increase on to their customers. However, since this grocery higher market price, this store decides to increase their selling price of the
go up) store grows its own lettuce rather than buy from a lettuce to US$2.30 per head also.
wholesaler, they are not affected by the cost increase.
As a result of the higher market price, however,
this store decides to increase their selling price of the
lettuce to US$2.30 per head also.

context of consumer reactions to an observed price increase, Hypothesis 3: A price increase under controllable
we postulated that the locus of causality and controllability circumstances will be perceived as less fair than one
would influence whether consumers ‘‘blame’’ the seller for under uncontrollable circumstances.
the price increase and consequently whether this influences Hypothesis 4: A price increase where the locus of
their perception of fairness. Contrary to prior research based causality is internal to a seller will be perceived as less
on the DE principle, we saw that even cost-justified price fair than one where the locus is external.
increases may be seen as less fair if consumers attribute the Corollary 1: Given Hypotheses 3 and 4, Scenario D will
increase to factors internal to and controllable by the seller. be perceived as the most fair.
Further, a price increase that is not driven by a cost increase
Corollary 2: Given Hypotheses 3 and 4, Scenario A will
may not be seen as completely unfair if it is in response to
be perceived as the least fair.
factors external to the seller. Study 3, therefore, was designed
to examine the impact of locus of causality and controll-
ability simultaneously on the perception of fairness of a price 3.3.1. Data
increase. In a sense, we attempt to combine the design and Again, the two products used in Studies 1 and 2 were used
outcomes of the first two studies. We also attempt to in this study. A 2  2  2 (Locus  Controllability  Prod-
operationalize more clearly the constructs of controllability Product) design was adopted. Separate scenarios were cre-
and locus of causality on the basis of cost justification and ated for each cell in the matrix and for both product
market price variations. This design not only helps better categories. Locus of causality was operationalized as
estimate of the main effects but also provides some insights whether market prices remained the same or went up. It is
into the interaction effects of these two variables. Scenarios reasonable to expect that consumers will make inferences
based on a 2  2 matrix (Locus  Control) were examined. about the locus of causality based on their observations of
Based on our first two studies, it can reasonably be con- competitive actions. Thus, if consumers observe market
cluded that the price increase scenario that is perceived both
beyond the seller’s control and has an external locus of
causality will be evaluated most favorably by customers. On Table 6
the other hand, a price increase that is perceived as within the Manipulation check for Study 3
seller’s control and has an internal locus of causality will be Lettuce Refrigerator Overall
treated as the least fair among all four scenarios. Based on Pairwise comparison using t tests:
this, we propose the following hypotheses corresponding to differences in controllability
(A and C vs. B and D) and
the following four scenarios:
locus of causality (A and B
vs. C and D)
Controllability difference 1.17* * 1.04* * 1.12* *
(AC vs. BD)
Scenarios Controllable Uncontrollable Locus of causality difference 2.29* * 1.82* * 2.09* *
Internal cause A B (AB vs. CD)
External cause C D ** Significant at P < .01.
 R. Vaidyanathan, P. Aggarwal / Journal of Business Research 56 (2003) 453–463 459

Table 7
Effect of causal locus and controllability on mean fairness perception: Study 3
Controllable Uncontrollable
Lettuce Refrigerator Overall Lettuce Refrigerator Overall
Internal cause 0.442 (1.465) 0.100 (1.698) 0.210 (1.580) 0.042 (1.661) 0.156 (1.606) 0.181 (1.702)
External cause 0.017 (1.549) 0.478 (1.739) 0.057 (1.565) 1.658 (1.020) 1.378 (1.397) 1.538 (1.195)
Standard deviation in parentheses.

prices to rise along with the seller’s price increase, they are
likely to locate the locus of the increase external to the seller.
On the other hand, if a seller raises its price while market
prices remain the same, the locus of causality is centered on
the seller. Similarly, controllability was operationalized on
the basis of whether a seller’s costs actually went up or not. If
a seller’s costs go up, the price increase was seen as
uncontrollable. If a seller increased prices despite its costs
remaining the same, it was classified as being controllable.
Based on these dimensions, we created scenarios that
represented each of the four cells in the matrix. For the first
cell (Cell A), we created scenarios where a seller increased
its price despite having no cost increases and despite
competitive market prices remaining unchanged. The
internal locus, uncontrollable condition (Cell B) had scen-
arios where the seller’s costs went up, but competitive
market prices remain unchanged. In Cell C, a price increase
that was matched by rising market prices (but not caused by
an increase in seller’s cost) was classified as external locus
and controllable. Finally, a price increase that was the result
of a cost increase and was matched by an increase in market
prices was seen as being uncontrollable and having an
external locus (Cell D). Examples of scenarios used in this
study are presented in Table 5.
Subjects were 80 undergraduate students at a Midwestern
University enrolled in various business classes. Forty sub-
jects each were assigned to the two product categories.
Then, they were presented a packet containing one of each
of the four scenarios in random order, each followed by an
identical set of questions. Thus, controllability and locus
were within-subjects factors and product category was
between-subjects. Measures for each scale were obtained
by averaging values of scale items for that measure.
3.3.2. Results
3.3.2.1. Measures. Scale items from the first two studies
were used in this study too. Both fairness and locus scales had
an acceptable Cronbach reliability (>.80). The two items of
the controllability scale had a Pearson’s correlation of .78
( P >.001). Also, for each of the three constructs, exploratory
factor analysis of the scale items returned a single-factor
solution, thereby indicating each scale’s unidimensionality.
3.3.2.2. Manipulation check. Measures of controllability
and locus of causality were examined to assess if the
manipulations worked in the intended fashion. The differ-
ences between scenarios on both the dimensions were large
and statistically significant. As noted in Table 6, the manip-
ulations worked for both the products separately as well as
jointly. For example, the mean difference between internal
and external locus of causality is statistically significant
( P < .01) for both lettuce and refrigerator. This is the case
for the controllability dimension as well. As two dimensions
were being simultaneously manipulated, we also conducted a
MANOVA test. Both locus of causality [ F(2,296) = 25.75,
P < .001] and controllability [ F(2,296) = 46.39, P < .001]
dimensions were significant. Thus, it may reasonably be
concluded that the manipulations were successful in having
the intended effect.
3.3.2.3. Fairness perception. Mean perceived fairness under
different scenarios are reported in Table 7 for lettuce,
refrigerator, and the two products combined. In order to
examine the main effects as well as any interaction effect
of locus and controllability, we first conducted repeated-
measures GLM. The results are reported in Table 8. As noted
in Table 8, the effects of locus of causality [ F(1,69) = 56.93,
P < .01 for overall] and controllability [ F(1,69) = 23.99,

Table 8
Effect of causal locus and controllability on fairness perception re-
Table 9
peated-measures GLM results: Study 3
Effect of causal locus and controllability on fairness perception multivariate
Lettuce Refrigerator Overall pairwise comparison of marginal means: Study 3
Wilk’s F Wilk’s F Wilk’s F Lettuce Refrigerator Overall
Factor g value g value g value
Locus of causality 1.021 * * 0.956 * * 0.993 * *
Causality 0.513 37.032* * 0.591 20.028* * 0.548 56.93* * (External Internal) (0.168) (0.214) (0.132)
Controllability 0.562 30.449* * 0.935 2.00ns 0.742 23.99* * Controllability 1.079 * * 0.322ns 0.755 * *
Causality  0.824 8.357* * 0.598 19.527* * 0.738 24.504* * (Uncontrollable Controllable) (0.196) (0.228) (0.154)
Controllability Standard error in parentheses.
** Significant at P < .01. ** Significant at P < .01.
460 R. Vaidyanathan, P. Aggarwal / Journal of Business Research 56 (2003) 453–463
Fig. 1. Effect of controllability and locus of causality on fairness: Study 3.
P < .01 for overall] were highly significantly. Also, a statist-
ically significant interaction effect (Locus  Controllability)
was observed [ F(1,69) = 24.504, P < .01 for overall]. The
results are consistent along the two product categories except
that the effect of controllability on fairness perception is not
significant for the refrigerator category. Thus, we find sig-
nificant support for Hypotheses 3 and 4.
Although we report a multivariate pairwise comparison
of marginal means for the two dimensions in Table 9, the
results should be interpreted with caution as the interaction
effects are significant.
In order to understand the interaction effects better, we
generated line graphs for the two dimensions (Fig. 1). As
can be seen from Fig. 1, there is a strong interaction effect
of controllability and locus. Whereas the difference
between external and internal locus is relatively small
for the controllable condition, it gets significantly accen-
tuated under the uncontrollable condition. Under the
uncontrollable condition, price increases in internal locus
scenarios are judged significantly less fair than in the
external locus scenarios.
Lastly, in the absence of availability of post-hoc pairwise
comparisons for a multivariate repeated-measures (for
within-subjects factors) design, we carried out univariate
pairwise comparisons to compare the magnitudes of four
cells. As noted in Table 10, Scenario D (external locus,
uncontrollable) is clearly viewed as the most fair price
increase among the four conditions. This, along with the
evidence noted above, provides support for Corollary 1.
However, the support for Corollary 2 is less strong.
Although the corollary is directionally supported, statistical
significance of the results was only marginal.
3.3.3. Discussion
The results of Study 3 add to the evidence on the
contextual dependence of consumer fairness perceptions.
One of Thaler’s recommendations was that in order to make
a price increase acceptable, a restaurant could simply add a
musical combo and disguise the price increase as an
entertainment charge (Withiam, 1994). Our results suggest
that even such a cost-justified price increase may not be
seen as very fair if competitive prices do not also rise, a
cost-based price increase if unilateral may be perceived as
controllable and therefore unfair. On the other hand, sellers
would be ill advised to simply raise their prices to take
advantage of higher market prices if consumers could
possibly discover that the seller’s costs did not increase.
Even if market prices rise, if a seller’s costs remain the
same, such a ‘‘market matching’’ price increase may be
perceived as unfair, as the locus of causality would be
internal to the seller in such case. The findings were
remarkably consistent across the two product categories,
suggesting reasonable generalizability.
4. General discussion and implications
Drawing on attribution theory, this paper presents a
framework within which to examine consumer responses
to observed price increases. The work builds on prior
research by economic psychologists that suggests consumer
perceptions of fairness may influence their reactions to price
changes. This paper specifically examined price increases.
The results of three studies suggest that contextual factors
may influence the reference transaction used by consumers
to evaluate an observed price increase. The main contri-
bution of this paper, however, is the framework within
 R. Vaidyanathan, P. Aggarwal / Journal of Business Research 56 (2003) 453–463
Table 10
Hypothesis test: differences in perceived fairness pairwise comparisons using t tests: Study 3
Lettuce
A D 2.10 * Strongly supported
B D 1.62 * Strongly supported
C D 1.68 * Strongly supported
A B 0.48 Directionally supported
A C 0.41 Directionally supported
* P < .01.
which to examine those contextual influences on fairness
perceptions. This paper is admittedly an early step in the
identification and categorization of the influences on fair-
ness perceptions. This research, along with the recent work
by Campbell (1998, 1999), provides an impetus for further
research on this interesting and important but rather
neglected area of pricing research.
This is one of the first studies to examine the contextual
dependence of fairness judgments and the robustness of the
DE principle. The DE principle suggested that when price
increases are cost justified, the consumer views them as fair
because sellers are entitled to their reference profit. Studies
1 and 2 empirically demonstrated that the principle has
important contingent requirements; in the absence of which,
it does not hold true. Respondents did not see several cost-
justified price increases as being fair. Study 3 demonstrated
that the price increase seen as most fair is one whose cause
is located external to the seller and is beyond the seller’s
volitional control. Thus, the overall conclusion of these
studies was that consumers with actual or inferred informa-
tion on the cause of a price increase will react based on that
additional information and will not automatically judge a
cost-justified price increase to be fair.
Studies 1 and 2 demonstrated the impact of locus of
causality and controllability on fairness perceptions. The
findings from these studies strengthen the belief that if
sellers want to positively influence consumer perceptions
of the fairness of a price increase, they need to highlight
the causes behind the increase (i.e., if the causes are
external and uncontrollable). These findings have public
policy implications too. Unscrupulous sellers could mis-
lead consumers into accepting an unnecessary price
increase by giving phony reasons. For example, between
February and July 2000, the oil prices in Midwest rose
sharply. The sellers blamed, among other things, the cost
increases imposed by OPEC countries and clean-burning
fuel standards (external and uncontrollable). However,
according to industry experts, the price increase actually
went over and beyond what could be reasonably justified
as a consequence of these causes (Court and Hamilton,
2000; Gasoline Price Spikes Spark US Political Firestorm,
2000). Thus, buyers and policymakers need to beware of
sellers who may use external, uncontrollable causes to
engage in price gouging. Also, it is important to note that
the cell means for internal cause in Study 1 (Table 2) and
461
Refrigerator Overall
1.28 * Strongly supported 1.75 * Strongly supported
1.22 * Strongly supported 1.72 * Strongly supported
1.86 * Strongly supported 1.48 * Strongly supported
0.06 Directionally supported 0.03 Directionally supported
0.58 Not supported 0.27 Directionally supported
controllable situation in Study 2 (Table 4) are statistically
equal to zero. Thus, respondents viewed price increases
attributable to external cause or uncontrollable factors
as fair, whereas their reactions to other two scenarios
were neutral.
Study 3 provided an operational definition of controll-
ability and locus of causality as consumer attribution
dimensions. Specifically, the operationalization introduces
the added factor of market prices. In a competitive market,
consumer reactions to seller price increases are made not
in isolation of other market prices. It was proposed that
how market prices change in relation to the price change
of a particular seller is an important influence on how
consumers react to the price change. The results showed
strong main effects as well as a significant Controllabili-
ty  Locus interaction that suggests that lack of control
was bolstered by external locus of causality in mitigating
the negative response to the price increase. In other words,
in order for a price increase to be judged fair, consumers
must perceive the price increase to be both beyond the
volitional control of the seller as well as caused by
external factors. The absence of either of these factors
can cause the price increase to be viewed as unfair. Thus,
it appears that controllability and locus are only marginally
substitutable by one another.
Lately, the State of California has been going through a
major energy crisis (Greenwald, 2001). Because of a sig-
nificant gap between power supply and demand, electricity
prices for several customer segments have gone up. The
results of our study indicate that consumers are more likely
to perceive the price increase to be fair if these were viewed
as both uncontrollable (the cost at which the California’s
utilities buy power went up) and caused by external factors
(out-of-state, deregulated energy producers bent on price
gouging California utilities). However, if California con-
sumers blamed poor planning (the 1995 deregulation itself),
then the cause becomes internal and the price increase will
be viewed as less fair.
Also, it is possible that when consumers do not have
information on the cost status of a seller, the seller can
effectively use a market price increase to justify an increase
in prices. This finding too has significant public policy
implications. It suggests that sellers might take advantage of
market price increases by increasing their prices with the
market. Any time, there is widespread belief among the
462 R. Vaidyanathan, P. Aggarwal / Journal of Business Research 56 (2003) 453–463
public that prices are going up (for example, with the widely
reported devastating impact of El Niño in 1998), sellers can
get away with increasing prices. Once consumers’ adapta-
tion levels have adjusted to the increased price, it is less
likely that they will demand a decrease in price when costs
go down.
5. Limitations and future research
This research is an attempt at understanding and cat-
egorizing consumer responses to price increases from a
fairness perspective. The study builds on past research and
complements recent emerging research in this area. Some
important limitations of this study, however, are as follows.
The experimental method was used to gain better control
over causal variables. This led to an increase in the
artificiality of the situation by having subjects react to a
series of written scenarios.
For the studies reported here, subjects were a conveni-
ence sample of students. Further, most were undergraduate
business students. Although use of student subjects is well
accepted in this stream of research (see, e.g., Folkes,
1984), it is still conceivable that business students react
differently, especially when it comes to judging seller
pricing actions, than the general population. Research
using randomly selected subjects from the general popu-
lation would greatly add to the generalizability of the
results. The use of naturally occurring price increases to
test the framework presented here (rather than using
artificially created scenarios) would also add to the gen-
eralizability of results.
Another worthwhile area of research would be the
examination of the issue of fairness from a seller’s perspect-
ive. How do sellers perceive the issue of fairness in
determining their justifications for a price change? Also,
just as attribution theory has developed considerably with
the addition of new causal dimensions, the theory of
consumer fairness perceptions could be further developed
with the thoughtful consideration of additional causal
dimensions that may influence those perceptions.
The work reported in this paper presents several avenues
for future research on contextual factors influencing how
consumers react to price changes. Although this paper
focuses on price increases, it remains to be seen if these
causal dimensions would work just as well when examining
consumer responses to price decreases or price maintenance
in the face of cost decreases. For example, consider a
scenario where seller’s costs decline. The DE principle will
suggest that sellers need not lower prices to reflect the cost
decline. However, the framework presented here would
suggest that whether consumers perceive the maintenance
of price in the face of a cost decline as fair would depend on
whether market prices decline along with the cost decline. In
that case, the price maintenance action may no longer be
seen as fair.
Interestingly, some media reports suggest that this third
contextual limitation of the DE principle is indeed happen-
ing in the marketplace. An Associated Press report dis-
cussed the widespread dissatisfaction with airline fares
(Johnson, 1998). Consumers considered it unfair that air-
lines were not passing on savings from fuel cost declines to
passengers. Perhaps the airline industry spokesperson
quoted in the article was familiar with Kahneman et al.’s
work on fairness perceptions, as he justified the failure of
the airlines to lower prices by explaining that there were
other costs that had gone up besides fuel costs and that
overall costs had risen. It is hoped that the framework
presented here spurs some additional research into these
and similar issues.
Acknowledgments
The authors wish to thank the editor, the two
anonymous reviewers, and Dr. Charles Schaninger, who
served as the Consulting Associate Editor for this paper.
We would also like to thank Daniel Knudsen for his help
with this project.
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