Fairness as a Constraint on Profit Seeking: Entitlements in the Market

Top Cited Papers
Publisher Website
Google Scholar
Abstract
Community standards of fairness for the setting of prices and wages were elicited by telephone surveys. In customer or labor markets, it is acceptable for a firm to raise prices (or cut wages) when profits are threatened and to maintain prices when costs diminish. It is unfair to exploit shifts in demand by raising prices or cutting wages. Several market anomalies are explained by assuming that these standards of fairness influence the behavior of firms. Just as it is often useful to neglect friction in elementary mechanics, there may be good reasons to assume that firms seek their maximal profit as if they were subject only to legal and budgetary constraints. However, the patterns of sluggish or incomplete adjustment often observed in markets suggest that some additional constraints are operative. Several authors have used a notion of fairness to explain why many employers do not cut wages during periods of high unemployment (George Akerlof, 1979;Robert,Solow, 1980). Arthur Okun (1981) went further in arguing that fairness also alters the outcomes in what he called customer markets - characterized by suppliers who are perceived as making their own pricing decisions, have some monopoly power (if only because search is costly), and often have repeat business with their clientele. Like labor markets, customer markets also sometimes fail to clear: … firms in the sports and entertainment industries offer their customers tickets at standard prices for events that clearly generate excess demand.

This publication has 0 references indexed in Scilit: