Price Saliency and Fairness: Evidence from Regulatory Shaming

What are the effects of attention to the price paid by other consumers on consumer demand and
firms’ pricing decisions? We study the effects of a regulation that required Israeli retailers to display
on-the-shelf signs indicating the (cheap) international price of a product alongside the price of that
product in the local store. We find that prices of products included in the regulation fell on average
by 8%. The price drop was larger for products that were initially more expensive compared to their
international price. Following the price drop, quantities sold increased. Yet, these increases were
significantly smaller than increases in quantities that we predict based on pre-regulation demand
elasticities and the actual price drops. Products that remained relatively expensive vis-á-vis their
international price exhibited larger differences between predicted and actual quantities sold. We
develop a theoretical model that explains these findings, and estimate it to quantify the importance
of salient unfair prices. We find that a 20 percentage-point salient difference between local and
international prices is equivalent to a 1% increase in the price of the local product itself. Next, we
use the model and its estimated parameters to calculate the impact of the regulation on consumer
utility. We find that utility declined for some products included in the regulation. This happens
when the disutility from observing that other consumers pay less exceeds the added utility from
reduced prices and increased consumption. We discuss potential implications of our findings for
optimal pricing strategies, price rigidity, and theoretical models of salient thinking.