Events

Professor Rajesh Bagchi
Associate Dean for Research, Graduate Programs, and Centers
R.B. Pamplin Professor of Marketing
Pamplin College of Business, Virginia Tech

ABSTRACT

Sometimes, firms justify price increases by citing an increase in their material costs; at other times, they justify the increases by citing an increase in their labor costs. Which justification – material or labor costs – is preferred by consumers? Previous theories suggest that material cost justifications are preferred because material costs tend to be more aligned, transient, and uncontrollable. However, this research shows consumers prefer labor cost justifications in certain contexts. Specifically, we document a novel psychological reaction that can be activated by price increase announcements – feelings of responsibility. Labor (vs. material) cost justifications can activate consumers’ feelings of responsibility to support low-wage labor and promote equality, making labor cost justifications appear fairer. The preference for labor (vs. material) cost justifications is demonstrated through preregistered laboratory studies, social media sentiment analysis, website traffic data, and stock market analysis. Importantly, we show that labor cost justifications are only preferred when feelings of responsibility are active. As such, the labor cost preference depends upon equality beliefs, the physical distance of labor, the type of labor beneficiaries, and consumers’ economic understanding of labor markets. Altogether, this research generates insights for managers seeking to announce price increases tied to labor cost justifications.