How corporate reputation affects customers

reactions to price increases

ABSTRACT The study investigates the impact corporate reputation has on cognitive,
affective and
behavioural customer reactions after price increases. Specifically, it includes inferred
motive, price fairness,
anger and purchase intentions. On the basis of equity theory, attribution theory and
the theory of cognitive
dissonance, the conceptual model is developed and tested using an experimental
design set in the airline
industry. Partial Least Squares serves to determine direct, mediated and moderating
effects. Findings confirm
that the more favourable the perceived reputation, the less likely customers are to
attribute negative motives for
the price increase or price unfairness. A larger price increase does not diminish the
impact reputation has on
perceived price fairness or on purchase intentions. Reputation also has an effect on
anger mediated by price
fairness. Firms should consider corporate reputation in pricing strategies as analysis
of reputation can assist in
forecasting consumer reactions to price increases and in augmenting profitability.
INTRODUCTION
Effective revenue and price management
requires correct forecast of customers reactions
to price changes (Homburg et al, 2005).
Although price increases are typically three to
four times more effective in increasing profitability

than a proportionate increase in sales

volume (Marn and Rosiello, 1992), the actual
profit leverage depends on customers behavioural
responses towards the specific price
change. It is essential to understand possible
negative customer reactions to price increases
such as deteriorated customer attitudes, defection,
unfavourable word of mouth or boycotts,
as well as the factors that aid in preventing them
(Dodds et al, 1991; Bolton and Lemon, 1999;
Kohli and Suri, 2011). To date, however,
customer reactions to price increases received
relatively little scholarly attention.
In this regard, the effects of perceived corporate
reputation should be of considerable managerial
and academic interest. A favourable corporate
reputation may increase customers value perceptions,
willingness to pay and purchase intentions
despite the price variation (for example,
Landon and Smith, 1997; Eberl and Schwaiger,
2005; Graham and Bansal, 2007). It is often
expected that a firm with a favourable reputation
can charge a price premium (Shapiro, 1983;
Neville et al, 2005; Cheema, 2008) because
reputation signals high quality of products and
services (Shapiro, 1983) and creates customerperceived
value (Petrick, 2002).
Although numerous studies have attempted
to determine the exact nature of the relationship

between corporate reputation and financial

success (for example, Vergin and Qoronfleh,
1998; Eberl and Schwaiger, 2005), research
providing empirical evidence regarding the
effects of reputation on individual stakeholder
perceptions is relatively scarce (Eberl and
Schwaiger, 2005; Walsh and Beatty, 2007), specifically
in pricing-related literature. Campbell
(1999) found reputation to moderate the impact
of inferred relative firm profits on the motive
consumers inferred for the price increase in an
auction setting with one-time purchase opportunities.
In addition, Cheema (2008) showed
that price surcharges affect purchases more for
sellers with lower customer ratings, a measure
used as a proxy for seller reputation. On the
basis of these initial findings, we address the
following research question: How does perceived
corporate reputation affect customers reactions to
price increases? The study makes the following
contributions: First, in response to criticism
that studies in pricing typically only include
product-related benefit and price perceptions
of customers (Alba et al, 1994), our focus on
corporate reputation adds a broader perspective.
Second, in adding to extant knowledge
regarding the interplay of reputation and
customers willingness to pay (Landon and
Smith, 1997; Graham and Bansal, 2007), we

empirically investigate the impact of corporate

reputation on cognitive, affective and behavioural
customer reactions after price increases.
Finally, this investigation of corporate reputation
provides a response to Taylor and Kimes
(2011), who advise researchers and managers to
focus on pricing fairness and its determinants
because of the strong relationship to purchase
intentions.
LITERATURE REVIEW
As has been well established, price increases
have a significant and immediate impact on
profitability of the firm. Of all the tools available
to marketing managers, pricing has the
most immediate impact on both the top and
bottom lines (Kohli and Suri, 2011, p. 2).
However, price increases are also risky as they
tend to affect customers value perceptions
(Petrick, 2002). According to prospect theory
(Kahneman and Tversky, 1979), which postulates
that people have a tendency to strongly
prefer avoiding losses to acquiring gains, it
would seem that price increases have a larger
impact on customers value perceptions than
gains in product utility (Monroe, 2005). As
price increases ceteris paribus decrease customers
perceived value, they negatively impact attitudes
towards the firm (Dodds et al, 1991),
leading to dissatisfaction, complaints and negative

word-of-mouth intentions (Bolton and

Lemon, 1999; Xia et al, 2004). In most circumstances,
raised prices will decrease demand and
increase switching (for example, Maxwell,
2002). In some cases, more drastic reactions
such as product boycotts may result (Xia et al,
2004). Such behavioural reactions following a
price increase are of specific managerial interest
because they directly impact profitability (Kohli
and Suri, 2011).
The size of the price increase plays a central role
when studying customer reactions (for example,
Dawes, 2009). In addition, price fairness
judgments which involve a comparison of a
price or procedure with a pertinent standard,
reference, or norm (Xia et al, 2004, p. 1) are a
recurring variable in research studies (Campbell,
1999; Homburg et al, 2005; Campbell, 2007).
As Taylor and Kimes (2011, p. 272) pointed
out, (p)erceived fairness is paramount to longterm
revenue maximization. If a price is perceived to be unfair, the process of price
determination is also most likely to be perceived
as unfair (Maxwell, 2002). According to the
dual-entitlement principle (Kahneman et al,
1986), a firm cannot increase its profits by
arbitrarily violating the entitlement of its customers
to the terms of the reference transaction
and reference price. Customers will accept
passed-on cost increases, but will perceive price

increases as unfair if they serve to maximize seller

profits (Martins and Monroe, 1994). Thus, customer
reactions do not depend on the absolute
price increase but on the context. In cases when
motives are perceived as fair (as, for instance, in
the case of increased costs for raw materials) more
favourable customer reactions can be expected
compared with cases when they have no information
on motives or perceive these as unfair
(Maxwell, 2002). A perspective largely neglected
in the literature takes into account the emotional
reactions associated with price increases (ONeill
and Lambert, 2001; Xia et al, 2004). Emotions
are mental states of readiness that arise from
appraisals of events or ones own thoughts
(Bagozzi et al, 1999, p. 184). Depending on their
emotional state, customers will perceive the same
price differently (Namkung and Jang, 2010).
Emotions may also be an outcome of price
variation (Campbell, 2007). For instance, price
increases may evoke negative emotions (Xia et al,
2004) such as anger. Finally, evaluations of the firm
are also relevant for customer reactions such as
satisfaction (Homburg et al, 2005), past pricing
strategies (Urbany and Dickson, 1991) or reputation
(Xia et al, 2004).
Corporate reputation is a global perception
of the extent to which an organisation is held in
high esteem or regard (Weiss et al, 1999, p. 75)

and as such reflects its relative success in fulfilling

the expectations of multiple stakeholders
(Walsh and Beatty, 2007). It is a socio-cognitive
construct based on the impressions people share
about a firm (Highhouse et al, 2009). Summarising
different definitions, Gotsi and Wilson
(2001, p. 25) conclude that corporate reputation
is a stakeholders overall evaluation of a company
over time. This evaluation is based on
the stakeholders direct experiences with the
company, any other form of communication
and symbolism that provides information
about the firms actions and/or a comparison
with the actions of other leading rivals. While
information sources used for assessing a firm
may differ for each stakeholder and different
reputational perceptions may exist for the
same firm, it has been suggested that a core
set of reputation attributes are shared across
stakeholders. Regarding these shared attributes,
reputational perception among stakeholders
is aligned (Bromley, 2001; Highhouse
et al, 2009).
The quality of products and services is one of
these shared attributes (Helm, 2007). All stakeholder
groups, but specifically customers, associate
high-quality offerings with a good corporate
reputation (Yoon et al, 1993; Neville et al, 2005).
Reputation facilitates decision-making processes

of customers and serves as a heuristic stimulating

purchase behaviour (Chun, 2005). Increased
customer acquisition, satisfaction and loyalty,
improved product and brand attitudes, higher
repurchase and cross-buying intentions, positive
word of mouth, and increased willingness to pay
are effects of corporate reputation associated
with customer demand and firm profitability
(for example, Yoon et al, 1993; Vergin and
Qoronfleh, 1998; Chun, 2005; Jeng, 2008). The
last mentioned effect, willingness to pay, coincides
with extant research purporting that corporate
reputation enables companies to establish
a price premium for their products and services
(Landon and Smith, 1997; Eberl and Schwaiger,
2005; Graham and Bansal, 2007) or increase
acceptance of partitioned prices (Cheema, 2008).
Customers acceptance of a price is determined
by perceptions of the value proposition offered
by the firm (Graham and Bansal, 2007). Before
purchase, customers compare anticipated costs
associated with obtaining (and using) the product
or service and the anticipated utility received in
return (Woodruff, 1997). The most common
interpretation of perceived value is the ratio or
trade-off between product or service quality and
price (for example, Sweeney and Soutar, 2001). However, additional factors may add
to better
understanding of customers value perceptions.

Petrick (2002), for instance, suggested that corporate

reputation is a dimension of perceived
value but, in a later study, failed to determine
a direct effect of reputation on perceived value.
However, reputation strongly affected quality
perceptions (Petrick, 2004). Hansen et al (2008)
argued that corporate reputation should have
a direct effect not only on the benefit side
of the value equation but also on the cost
side, and explained that if a suppliers reputation
is superior to its competitors less resources will
be allocated towards safeguarding activities. That
in turn reduces monitoring costs for customers.
The authors find a strong direct effect of corporate
reputation on perceived customer value in
business services.
As companies with a favourable reputation
offer customers more value, it is to be
expected that they can charge higher prices.
Although the relationship between corporate
reputation and price premiums is increasingly
discussed in the literature, the impact of
reputation in cases of price increase has
remained rather uncertain. Our research adds
to the noted study conducted by Campbell
(1999) which was limited to a specific setting
(one-time auction) and analysed reputation as
a moderator of the impact of inferred relative
firm profit on inferred motive. We broaden

this perspective and investigate the effect of

corporate reputation on a wider set of reactions
in the case of a regular price increase in a
more familiar consumption setting.
THEORYAND HYPOTHESES
We use equity theory, the theory of cognitive
dissonance and attribution theory to explain
how corporate reputation affects customer
reactions to price increases. Equity theory
(Adams, 1965) focuses on customer assessments
of the costs and benefits of a transaction. Equity
theory is based on the concept of social
exchange (Homans, 1958), postulating that
people evaluate exchange situations by judging
the distributive fairness of the exchange.
Inequity exists if an individual perceives that
their outcomeinput relation is smaller than that
of a reference person or the exchange partner
(that is, the firm). Perceived inequity leads to
tension which as explicated in the theory of
cognitive dissonance (Festinger, 1957) evokes
emotional as well as behavioural reactions
(Adams, 1965; Namkung and Jang, 2010).
Some possible reactions are dissatisfaction and
anger. The extent of emotional reaction
depends on the degree of perceived distributive
inequity (Adams, 1965). Equity theory has been
applied in the context of pricing and reactions
to price increases (for example, Martins and

Monroe, 1994; Homburg et al, 2005) and

suggests that a customer compares the relation
of outcome and input before and after the price
increase. If the net benefit after the price
increase is smaller, the customer is expected to
perceive dissonance (Festinger, 1957) and
reduced fairness (Adams, 1965). The extent of
the dissonance is affected by attributions made
regarding the reasons for the price increase
(ONeill and Palmer, 2004).
Attribution theory (Heider, 1958; Weiner,
1986) explains how people with limited or
no information attempt to find explanations
for events that are surprising, negative and/or
important to them (Weiner, 1986), and predicts
that ascription of causes or causal attributions
influence subsequent perceptions
and behaviour. Customers make attributions
about a broad range of different events
such as product and service failures, reasons
for brand switching and employee strikes, or
celebrities motivations for endorsing products
(Dean, 2004).
It is likely that customers also make attributions
and develop their own subjective interpretation
regarding price increases if the actual
reasons remain unknown (Campbell, 1999;
Maxwell, 2002; Xia et al, 2004). The presumed
motives for the price increase are likely to be

consistent with the firms reputation as the

latter derives from the firms past actions
(Campbell, 1999). As Xia et al (2004, p. 5) pointed out: A sellers good reputation
may []
decrease buyers price unfairness perceptions
when a disadvantaged price inequality occurs
because customers grant the benefit of the
doubt regarding the reasons for the price
increase if they like the firm (Campbell, 1999).
Comparable findings are reported by Coombs
and Holladay (2006) who investigated the role
of reputation in the context of product crises
and found that a favourable reputation can
create a halo shielding the firm from negative
customer reactions.
One might, however, also come to the
contrary conclusion. Customers have high
expectations regarding well-reputed companies.
As reputation is formed over time, based
on what the organization has done and how it
has behaved (Balmer and Greyser, 2003), the
price increase may violate expectations regarding
the firms conduct. In such situations,
negative events are graver as people take preexisting
attitudes or expectations into account
when evaluating new events or objects
(Brown and Dacin, 1997). Thus, higher customer
expectations regarding future actions
might actually disadvantage well-reputed

companies (Coombs and Holladay, 2006). For

instance, the study on product recalls conducted
by Rhee and Haunschild (2006) found that,
because of the expectancy violation effect, wellreputed
firms can suffer a liability relative to
badly reputed firms, making reputation a doubleedged sword in that it may have a significant
downside. However, the expectancy violation
effect could be neutralized in the case of price
increases which are rather commonplace in
todays markets. Customers often attempt to
avoid or reduce dissonance by selective exposure
to or re-assessment of information (Festinger,
1957) and they might ignore information that
violates or contradicts their expectations regarding
a firm they already view favourably (Coombs
and Holladay, 2001). This is in line with
the theory of motivated reasoning (Jain and
Maheswaran, 2000) which postulates that customers
are motivated to yield preferred conclusions
resulting in biased processing of new information
(Dean, 2004). Thus, it is likely that customers
will give well-reputed firms the benefit of the
doubt and not infer negative motives for a given
price increase. Hence, we hypothesize that:
Hypothesis 1: The more favourable customers
perceptions of corporate reputation,
the less negative their perceptions of the
firms motive for the price increase.

Reputation is often associated with legitimacy

and consistency (King and Whetten, 2008)
explaining why customers are more likely to
perceive a price increase as fair if the firm has a
favourable reputation. Corporate reputation
serves as a heuristic for customers in attributing
motives for the price increase. However, this
benefit of the doubt should no longer be granted
if the price increase reaches a certain level, meaning
that the size of the price increase negatively
moderates the relationship between reputation
and perceived fairness. We hypothesize that:
Hypothesis 2a: The more favourable customers
perceptions of corporate reputation,
the higher their perceptions of price fairness.
Hypothesis 2b: The larger the price increase,
the weaker the positive effect of corporate
reputation on perceived price fairness.
If the cause for a negative event is stable
and controllable by the firm, customers may
develop negative emotions (Weiner, 1986;
Folkes et al, 1987) which is also a likely response
to price increases. In his explanation of attribution
theory,Weiner (1986) stated that customers
appraisal of an event and resulting emotions and
cognitions are guided by the identified causal
dimensions. Anger, for instance, is brought
about by negative situations that one believes
could have been controlled by someone else

(Watson and Spence, 2007, p. 502). Accordingly,

customers of a well-reputed firm who perceive a
price increase as fair (not controllable) should not
be likely to experience anger. It is hypothesized:
Hypothesis 3: The more favourable customers
perceptions of corporate reputation,
the lower their anger. This relationship is completely mediated by perceived price
fairness.
The positive relationship between corporate
reputation and (re)purchase intentions has been
theoretically and empirically supported in
numerous studies (for example, Shapiro, 1983;
Yoon et al, 1993; Jeng, 2008). However, as the
benefit of the doubt induced by corporate
reputation may be attenuated if the price increase
surpasses a certain level, negative customer reactions
can occur despite a favourable corporate
reputation. The more substantial the price
increase, the larger the decrease in customer
demand, that is, purchase intentions and purchase
behaviour (Bolton and Lemon, 1999; Homburg
et al, 2005; Dawes, 2009).We hypothesize:
Hypothesis 4a: The more favourable customers
perceptions of corporate reputation,
the higher their purchase intentions.
Hypothesis 4b: The larger the price increase,
the weaker the positive effect of corporate
reputation on purchase intentions.
As noted earlier, extant literature accepts the

notion that customer reactions to prices and

price increases depend on the (assumed) reasons
or motives for the price increase that determine
perceptions of price fairness (Martins and
Monroe, 1994; Campbell, 1999; Maxwell,
2002; Xia et al, 2004). Negative motives for the
price increase lead to perceptions of unfairness.
We hypothesize:
Hypothesis 5: The more negative customers
view the motive for the price increase, the
lower their perceptions of price fairness.
Prior empirical analysis of customer reactions
to price increases has mostly emphasized cognitive
factors such as attribution of motives and
fairness (ONeill and Lambert, 2001; Campbell,
2007), neglecting emotional factors (ONeill and
Lambert, 2001; Xia et al, 2004). But already
Homans (1958) argued that when the outcome
of an exchange is lower than expected the
recipient is likely to feel anger. As a price increase
diminishes the customers outcome/input ratio
while potentially benefitting the firm, this unbalanced
transaction can lead to perceived unfairness
(Adams, 1965), negative emotional reactions
such as anger, and decreased purchase intentions.
This leads us to hypothesize that:
Hypothesis 6: The larger the price increase,
the lower perceived price fairness.
Hypothesis 7: The larger the price increase,

the greater customers anger.

Hypothesis 8: The larger the price increase,
the lower purchase intentions.
Customers have been found unlikely to
continue patronizing a firm that has behaved in
an unfair manner (Kahneman et al, 1986;
Campbell, 1999; Taylor and Kimes, 2011). Fairness
perceptions are also likely to impact negative
emotions such as anger (Xia et al, 2004;
Namkung and Jang, 2010) which in turn strongly
affect behaviour (Folkes et al, 1987).We therefore
expect the effect of fairness perceptions on behavioural
intentions to be mediated by anger (Xia
et al, 2004) and hypothesize:
Hypothesis 9: The higher customers perceptions
of price fairness, the higher their
purchase intentions. This relationship is
partially mediated by anger.
The conceptual model for the study is
summarized in Figure 1.
EXPERIMENTAL STUDY
Research design and participants
In order to establish the hypothesized relationships,
we conducted an experiment utilizing a
22 between-subjects design. We manipulated
corporate reputation (favourable versus unfavourable)
and price increase (large versus moderate).
All groups were completely randomized.
In accordance with prior experimental studies

(for example, Dollinger et al, 1997; Campbell,

1999; Taylor and Kimes, 2011), we employed a
scenario design. We chose the airline industry as the setting
because corporate reputation is specifically
important in airline services due to customers
high-risk perceptions (Lee, 2005; Neville et al,
2005). Specifically, as the introduction of lowcost,
new entrant airlines, price variations are
common in this industry (Brunger and Perelli,
2009) and the price discrimination tactics broadly
employed emphasize the role of perceived fairness,
customer trust (McMahon-Beattie, 2011)
and corporate reputation. We used a student
sample to achieve homogeneity of the sample;
prior studies in reputation research as well as
pricing have successfully employed student samples
as well (Campbell, 1999; Maxwell, 2002;
Graham and Bansal, 2007). In total, 276 business
students from two German public universities
participated in the study. We excluded 26 questionnaires
from further analysis: 12 students
indicated that they had not used airlines in the
year preceding the study and 14 were excluded
due to their incomplete data. This procedure led
to a net sample size of 250. Of these, 115 (46 per
cent) students were female. Participants were on
average 22 years old and their average monthly
income was 532.
Procedure

Including all possible characteristics of a firms

reputation would have led to extreme complexity
of scenarios. As research has shown that stakeholders
focus on a limited set of facets when
evaluating a firms reputation (Bromley, 2001;
Helm, 2007; Highhouse et al, 2009), a core set
of attributes were identified in a preliminary
study in which we asked 98 students to take on
a customer role and list important attributes of
corporate reputation. We identified customer
orientation, product quality, fair treatment of
employees and perceived value for money as the
most relevant reputational attributes. Because
the evaluation of reputation may be based on
different information sources such as personal
experience, word of mouth, a firms media
profile or public relations activities (Bennett
and Kottasz, 2000), we designed the scenario
to imply that participants gained information
about the firm from several information sources.
Each subject received a questionnaire booklet
with the description of a specific transaction
with a fictitious airline. All participants were
asked to imagine that, in 2 months, they
intended to visit their best friend who was
spending a semester abroad in London. Their
online search for a good connection led them to
a ticket offer from the fictitious airline. Participants
were told that they were familiar with this

airline because several of their friends had used it

in the past and they had also seen the airlines
commercials. Furthermore, they had recently
read an article on current airline rankings conducted
by an independent testing facility. To
manipulate reputation positively, participants
were told that, as in recent years, passengers
ranked the airline first in service and value for
money. The airline was also described as a very
popular employer. In the negative reputation
scenario, the airline was said to have been
ranked last and was a very unpopular employer.
To establish price and price increase of the
ticket, we used real market data generated from
a German Internet flight agency. The average
price for the one-way ticket to London was 55
and price increases between 4.8 and 20 per cent
were recorded over the time period of the
research project. Accordingly, we manipulated
the price increase by informing participants that the airline increased prices by 3 and
10,
respectively. Specifically, participants were told
that shortly before they intended to book their
flight to London, they learned that the airline
had announced price increases so that the ticket
would now cost [3/10] more (the price rose
from 55 to 58/65 including taxes and fees).
To facilitate subjective attributions of motive
and fairness, we did not provide information

regarding reasons for the price increase.

Measurements of the dependent variables
and the constructs for manipulation checks were
based on established scales (see Table 1 for
individual items and literature). Specifically, we
used a global measure for corporate reputation
to reflect shared meanings as reputation, according
to Weiss et al (1999, p. 75), tends to be
regarded as a unidimensional, not multidimensional,
construct. All items were measured on
seven-point scales with 1 indicating low or
unfavourable values and 7 indicating high or
favourable values. Finally, the questionnaire
contained demographic information, participants
average annual flight frequency, measures
for the realism of the scenario and participants
understanding of the goal of the research.
Results
First, we checked the realism of the scenarios.
Participants regarded the scenario as realistic and
they could imagine the situation well (realistic =
5.74, imagine =5.48). Second, we ensured that
our manipulations of reputation and price
increase were successful. We established a significant
main effect of the factor corporate
reputation on perceived reputation (F(1;
246)=556.642, P<0.001) whereas the main
effect of the size of the price increase was not
significant (F(1; 246)=0.397, n.s.). This means

that perceived reputation was only influenced

by the manipulation of reputation, not the
manipulation of price increase. We then confirmed
successful manipulation of positive and
negative reputation (pos rep=5.52, neg rep=
2.44, t(df =248)=23.486, P<0.001). Manipulation
of price increase did not affect
reputation (PIlow=3.94, PIhigh =3.90, t(df=
248)=0.187, n.s.).
Next, we assessed convergent validity for the
construct measures using factor loadings
(0.76), t-values (17.56) and composite reliability
(CR0.87). To fully satisfy requirements
for discriminant validity, average variance
extracted (AVE) has to exceed the recommended
threshold of 0.5 and to be larger than
the variance shared between constructs (Fornell
and Larcker, 1981). All squared covariances
were smaller than the AVE (AVE0.70). See
Table 1 for detailed results.
Following Bagozzi et als (1991) suggestions
for analysing experimental data, we employed
Partial Least Squares (PLS) analysis which works
well with comparatively small sample sizes and
binary variables (see also Lei et al, 2008). As a
non-parametric estimation procedure, PLS uses
as its conceptual core an iterative combination
of principal components analysis that relates

measures to constructs and path analysis that

captures the structural model of constructs.
Using the bootstrap procedure packaged in the
SmartPLS 2.0 software (Ringle et al, 2005), we
calculated the standard deviation and an
approximate t-statistic. To assess the structural
model, we evaluated path coefficients and t-tests
as well as the coefficient of determination (R2).
In addition, the predictive relevance of the PLS
model can be assessed using the Stone-Geisser
sample reuse technique (Q2; Chin, 1998). R2s
were larger than 0.3 except for Negative motive
and Anger; Q2 was above 0 for all dependent
variables (see Figure 2). Corporate reputation,
Extent of price increase and Price fairness did
not substantially contribute to an explanation of
the variance of Anger (22 per cent); Corporate
reputation only marginally contributed to an
explanation of the variance of Negative motive
(5 per cent). Nevertheless, all constructs were
retained in the model to facilitate mediation
analyses (see below). Figure 2 shows the results
for direct effects including path coefficients and
significance. To estimate full and partial mediation,
the direct effect of Price fairness on Anger
and Anger on Purchase intention needed to be included (see dotted lines in Figure 2).
Path
coefficients indicated that, with the exception
of the effect of Corporate reputation on Anger,

Anger on Purchase intention and the effect of

Extent of price increase on Anger, effects were
significant at the 5 per cent level.
To better understand potential mediated
effects, mediation was tested according to the
method suggested by Baron and Kenny (1986).
Structural equation models allow for simultaneously
estimating the direct path (for example,
Corporate reputationAnger) and the indirect
path (for example, Corporate reputationPrice
fairnessAnger). That is, the mediated effect is
tested while statistically controlling for the
direct path. To establish the mediating effect,
the indirect effect must be significant. To test
for significance, we applied a Sobel test (Baron
and Kenny, 1986). The relationship between
Corporate reputation and Anger was fully
mediated by Price fairness (z=3.71), meaning
that the effect of Corporate reputation on
Anger was fully dependent on how customers
perceive the fairness of the price increase. Price
fairness affected purchase intentions significantly
but, contrary to our expectation, the effect was
not mediated by Anger. Given that no significant
effect of Anger on Purchase intention
could be established, there also was no mediation
effect.
Finally, we checked the proposed moderating
effects of Extent of price increase.

Moderating effects impact the strength and/or

direction of the relationship between exogenous
and endogenous variables (Baron and
Kenny, 1986) and can be estimated based on
interaction effects (for example, Lei et al, 2008).
The interaction effect can be assessed using the
coefficient of determination (R2) to calculate
the effect size ( f 2). However, effect sizes of
Extent of price increase were negligible
( f 2=0.0034 and 0.0080).
DISCUSSION
The study results provide support for most of
the hypothesized direct effects. Results confirm
that perceived corporate reputation plays an
important role in understanding customer reactions
to price increases. First, we could establish
a significant effect of reputation on perceived
motives of the firm, supporting Hypothesis 1.
The more favourable the perceived reputation,
the less likely customers are to attribute negative
motives for the price increase. However, the
share of variance explained is low, meaning that
reputation alone is not sufficient in determining
the valence of the motive. Additional factors
such as the general economic conditions of the
industry or competitors actions might additionally
aid customers in attributing motives for
price increases. In support of Hypothesis 2a,
perceived reputation was found to impact perceived

price fairness. If companies with a

favourable reputation are raising prices, customers
are more likely to accept this as a fair move
compared with companies with an unfavourable
reputation. The moderating effects of the
extent of the price increase suggested in
Hypothesis 2b could not be established indicating
that the relationship between perceived
reputation and perceived price fairness is not
affected by the extent of the price increase.
Even if customers perceive a price increase as
larger, this may not diminish the impact reputation
has on perceived price fairness.
We could also show that perceived corporate
reputation has an effect on anger which in
confirmation of Hypothesis 3 is completely mediated by perceived price fairness.
Reputation
alone does not affect the emotional reaction
to a price increase; emotional reaction
largely depends on perceived fairness of the
price increase. In addition, while directly and
significantly impacting purchase intentions in
support of Hypothesis 4a, the moderating effect
of the extent of the price increase suggested in
Hypothesis 4b could also not be established.
The impact of reputation on purchase intentions
is not affected by the extent of the price
increase. This may mean that corporate reputation
is a stable determinant of purchase intentions

regardless of the size of a price increase.

The extent of the price increase showed a
significant negative effect on purchase intentions
in support of Hypothesis 8. Perceived
price fairness is significantly affected by the
extent and the perceived motive for the price
increase, supporting Hypothesis 5 and Hypothesis
6. If the price increase appears to be large or
customers perceive a negative motive for the
price increase, perceived price fairness decreases.
The extent of the price increase, however, did
not directly affect anger leading us to reject
Hypothesis 7. Price fairness directly and significantly
affected purchase intentions as well as
anger as an emotional reaction to price
increases. This means that the more positive
the cognitive appraisal of a price increase, the
less likely customers are to become angry. We
found no significant relationship, however,
between anger and purchase intentions, meaning
that the mediated effect of anger on the
relationship between price fairness and purchase
intentions as hypothesized in Hypothesis 9 had
to be dismissed.
IMPLICATIONS
The study results indicate that it pays off for
companies to invest in their reputation as it
buffers from negative repercussions of price
increases. This might be specifically relevant for

industries using dynamic pricing where competitors

face the risk of entering price wars, such
as airlines (Burger and Fuchs, 2005). Here,
perceptions of fairness and reputation may
become particularly important as multiple
prices exist for ostensibly identical units of
output (McMahon-Beattie, 2011). Given the
high effectiveness of price increases in augmenting
profitability (Marn and Rosiello, 1992;
Homburg et al, 2005), such findings are important
in gauging customer reactions. We showed
that a favourable reputation enables firms to
command higher prices without having to face
the negative reactions a badly reputed firm
would have to fear. Higher reputation also leads
to increased purchase intentions, positively
impacting sales. Although pricing has to be
modified very carefully (Kohli and Suri, 2011),
a firm with a good reputation seems to have
more leeway in raising prices.
Before establishing price increases, managers
should therefore take into account the firms
reputational standing. But not only is reputation
notoriously hard to monitor (Walsh and Beatty,
2007), a strong emphasis on short-term sales
maximization could conflict with the achievement
of a favourable reputation (Avlonitis and
Indounas, 2005). Managers may feel tempted by
the short-term profits resulting from exploitation

of a favourable reputation, specifically as

most incentive schemes implemented in firms
today are not necessarily geared to safeguard
long-term assets such as reputation.
Some industries are in the limelight of public
discourse more than others. Price increases that
affect broad segments of the population such as
travel and mobility, food, insurance or health
care are widely discussed by the media and the
citizens. Here, favourable corporate reputation
can help to reduce negative repercussions. In
the long term, however, reputation is also likely
to be affected by pricing decisions, calling for
a careful approach in communicating price
changes. It is important to note that customer
perception of the reason underlying a price
increase has a strong impact on perceived price
fairness. As our study implies, perceptions of
motives for the price increase and price fairness
are affected by corporate reputation, granting
good companies the benefit of the doubt when increasing prices. Airlines and other
companies
should recognize how important psychological
aspects such as perceived corporate
reputation are in the establishment of effective
pricing strategies (Namkung and Jang, 2010).
LIMITATIONS AND FUTURE
RESEARCH OPPORTUNITIES
Our study exhibits limitations and offers several

opportunities for further research. First, general

disadvantages from using a student sample have to
be considered, although we may assume acceptable
external validity as we ensured that the
student participants were familiar with the service
category (Lynch, 1999). Using a more heterogeneous
customer sample could result in more
variance and would also facilitate inclusion of
additional personal characteristics. Similarly, general
concerns regarding the use of fictitious
scenarios and experimental designs apply. As
online channels account for the majority of airline
ticket sales (Brunger and Perelli, 2009), our
scenario was realistic. However, information presented
to participants may have been more
condensed than is usually the case although airline
customers have been found to use rather limited
search strategies (Brunger and Perelli, 2009). By
including real companies or brands, future studies
could focus on the interplay between reputation
and participants prior experiences with the firm,
thereby shedding light on possible context or
expectancy violation effects (Brown and Dacin,
1997; Rhee and Haunschild, 2006).
The manipulation of reputation in experimental
designs is prone to criticism, given that
reputation is thought to evolve over time (Gotsi
and Wilson, 2001). Our experimental manipulations
aimed at improving internal validity by

identifying shared reputational criteria while

including different hypothetical information
sources (Bennett and Kottasz, 2000). As we
attempted to create a realistic scenario, we
excluded information on the firms motivations
in increasing prices which are often not made
public. However, this may have decreased the
manipulations strength in evoking a strong
emotion such as anger. A similar finding
was reported by Namkung and Jang (2010). In
their study on service fairness, they established
a non-significant relationship between
negative emotion and behavioural intentions
and interpret this as a result of participants
variations in emotional expressivity and/or
involvement that could obstruct the expression
of negative feelings, even on self-reported questionnaire
(Namkung and Jang, 2010, p. 1250).
A scenario suggesting a self-interested motive of
the firm might elicit stronger anger in participants.
In addition, anger resulting from the price
increase might not impact purchase intentions
but variables outside the nomological network
of our study, for instance complaint intentions
or word of mouth (Watson and Spence, 2007).
This suggests that future studies might include
additional outcome variables as well as other
emotional reactions. The strength of these
emotions might also depend on the way the

price increase is communicated to customers,

adding another possible avenue for research.
Studies in different industries characterized
by more or less price transparency could add to
a better understanding of the role of reputation
and possible customer reactions. Determination
of thresholds between large and small price
increases or inclusion of dynamic pricing
schemes would offer clear guidance for marketers
in optimizing pricing strategies. To date,
research on dynamic pricing has only explored
revenue impacts (Burger and Fuchs, 2005), but
not the effects on other value components, such
as reputation. Finally, it would be beneficial to
analyse how pricing strategies that focus on
short-term profit maximization affect long-term
management of intangible assets such as reputation
(Doyle, 2008). This would not only be of
interest for pricing and reputation management
but would also be relevant at the level of
corporate governance and public discourse