Behavior-based pricing and consumer fairness concerns with green product design

Technological innovation enables firms not only to produce green and energy-efficient products but also to more conveniently collect consumer data for price discrimination. However, such price discrimination can easily lead to unfairness when consumers find that they pay a higher price for the same product than others. This paper considers a two-period model with two firms differentiated with respect to greenness and studies the impact of behavior-based pricing (BBP) on the firm when consumers exhibit fairness concerns and the products differ in the improvement in their greenness. We find that when the greening improvement level is exogenous, the existence of consumer fairness concerns and differentiation in the level of greenness make the firm's practice of BBP profitable. When the greening improvement level is endogenous, fairness concerns can increase the differentiation in the improvement in greenness. In addition, consumers' fairness concerns do not always lead to BBP practices yielding a higher consumer surplus. The differentiation in the greenness level and fairness concerns mean that the use of BBP reduces social welfare.