Attention to Fairness versus Profits: The Determinants of Satisficing Pricing

• Author: Brian T. McCann,George A. Shinkle
• DOI: http://doi.org/10.1111/joms.12246
• Date: 01 July 2017
• Published date: 01 July 2017

Attention to Fairness versus Profits:

The Determinants of Satisficing Pricing

Brian T. McCann and George A. Shinkle

Vanderbilt University; UNSW

ABSTRACT We investigate determinants of the competitive behaviour of satisficing, non-profit-

maximizing pricing. Taking a behavioural approach, we argue that pricing decisions are

motivated by fairness objectives as well as the desire to achieve economic objectives. We draw

from the attention-based view to build our theoretical model explaining the contextual

conditions that are most likely to be associated with attention to fairness relative to attention

to achieving maximum profits when setting prices. Our hypothesized predictors of satisficing

pricing decisions encompass the institutional context in which the firm is embedded, the

exchange context with customers and suppliers, and the context internal to the firm.

Hypotheses are tested with survey data of over 3000 firms from 15 countries. We find that the

decision to set prices at a satisficing level is remarkably common, and its prevalence is

associated with contextual factors that are consistent with greater attention to fairness

concerns.

Keywords: attention-based view, competitive strategy, fairness, pricing, satisficing

INTRODUCTION

Price setting is one of the most common decisions of firms, and it has considerable direct

influence on revenue and profit. Much of the existing literature concerning pricing deci-

sions has tended to view firms as rational agents pursuing a goal of maximizing profit;

this assumption is somewhat concerning, however, because empirical evidence indicates

that firms frequently do not price to achieve maximum profit. More specifically, surveys

of pricing objectives indicate that a significant number of firms set prices pursuant to an

objective of achieving satisfactory, but not necessarily maximum, profit levels (Diamanto-

poulos, 1991; Diamantopoulos and Mathews, 1994; Samiee, 1987). That is, the prior lit-

erature demonstrates that some firms do price to optimize but others ‘satisfice’. To be

Address for reprints: Brian T. McCann, Associate Professor of Strategic Management, Owen Graduate

School of Management, Vanderbilt University, 401 21st Avenue South, Nashville, TN 37203, USA

(brian.mccann@owen.vanderbilt.edu).

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 54:5 July 2017

doi: 10.1111/joms.12246

clear, this particular form of satisficing behaviour is not due to cognitive limitations asso-

ciated with bounded rationality. Instead, it represents situations in which decision-

makers believe they could increase profits by charging a higher price but elect not to do

so. Unfortunately, the existing literature provides relatively little insight about the condi-

tions under which firms are more or less likely to set prices at satisficing levels – our aim

is to begin building such insight.

The theoretical model we build to explain satisficing pricing relies upon two key con-

cepts. First, we draw from prior literature showing that economic exchange behaviour is

influenced by desires to act in c oncert with norms of fairness. Jolls et al. (1998) describe

this phenomenon as ‘bounded self-interest’, or the pursuit of economic objectives bounded

by norms of fairness and reciprocity. This principle suggests that firm decision makers are

interested in achieving profitability in their pricing actions, but they also have an objective

of setting fair prices. Second, we draw from the attention-based view (ABV) to guide our

selection of constructs to predict satisficing pricing decisions. The fundamental premises of

the ABV contend that (i) what decision-makers do depends upon the issues and answers

they focus their attention on and (ii) what decision-makers focus on depends on particular

aspects of their organizational and environmental context (Ocasio, 1997). Drawing from

these premises of the ABV leads us to investigate the influence of both formal and infor-

mal institutions (institutional context), reciprocity with customers and suppliers (exchange

context), and performance relative to aspiration (internal organizational context). We test

our predictions with a sample of over 3000 firms from 15 countries across a range of

industries. Satisficing pricing is remarkably common in our data, and our empirical analy-

ses largely support our predictions: firms set satisficing prices conditional on contextual

factors suggested by the ABV that are associated with greater allocation of attention to

fairness compared to attention to profit maximization.

Our effort to highlight satisficing pricing and to begin building understanding of fac-

tors associated with its prevalence contributes to the competitive strategy literature. Our

work provides a complement to much of the prior literature in competitive strategy,

which generally adopts the logic of economics (Rumelt et al., 1991) in assuming maximi-

zation objectives. It further extends behavioural approaches built upon assumptions of

the limited capabilities of decision-makers (Powell et al., 2011), such as bounded ration-

ality. Specifically, we extend research to explore a competitive behaviour undertaken by

a firm decision-maker who ‘may not care to maximize, but may simply want to earn a

return that he regards as satisfactory’ (Simon, 1959, p. 262). Competitive actions moti-

vated by satisficing rather than maximizing objectives have remained a surprisingly

understudied form of decision in the strategy literature. Our theoretical arguments cre-

ate a behaviourally-based model of the determinants of satisficing pricing built upon the

concepts of focus of attention (Ocasio, 1997; Simon, 1997) and self-interest bounded by

fairness concerns (Jolls et al., 1998). We do caution that our arguments and evidence

should not be interpreted as a wholesale rejection of the profit maximization assumption

– many firms strive to maximize. But, our research does indicate that a more complete

understanding of competitive behaviour requires investigation of a richer universe of

behaviours. And, because these behaviours result from attention to different types of

objectives, they are likely related to a different set of factors than have been considered

in the existing competitive strategy literature.

584 B. T. McCann and G. A. Shinkle

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies