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Signalling Price Image Using Advertised Prices

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  • Duncan Simester

    (University of Chicago)

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    Abstract

    This paper addresses the issue of retail price image by offering an explanation for how and when stores can use their advertised prices to signal the prices of other products in the store. A model of a two-product retail market is presented in which stores advertise the price of one product and customers do not know the price of the other product before selecting which store to visit. In a model with full customer information, stores with different marginal costs charge different prices for each product. When customers do not know each store's marginal cost type, an opportunity arises for each store to signal its cost type using its advertised prices. In such a model, additional equilibria exist. In particular, stores with different costs may charge the same advertised price while continuing to charge different prices for the unadvertised product. Data from competing drycleaning stores is generally consistent with the model predictions. A number of additional properties of the equilibria are discussed and possible extensions to the model are proposed.

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    File URL: http://dx.doi.org/10.1287/mksc.14.2.166
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 14 (1995)
    Issue (Month): 2 ()
    Pages: 166-188

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    Handle: RePEc:inm:ormksc:v:14:y:1995:i:2:p:166-188

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    Related research

    Keywords: signalling; pricing; price image; advertising;

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    Cited by:
    1. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
    2. Glenn Ellison, 2004. "A Model of Add-on Pricing," Economics Working Papers 0049, Institute for Advanced Study, School of Social Science.
    3. Jung, Heonsoo, 2011. "Signaling quality with new product preannouncements: Vaporware and the role of reference quality," Journal of Business Research, Elsevier, vol. 64(11), pages 1251-1258.
    4. Glenn Ellison & Sara Fisher Ellison, 2004. "Search, Obfuscation, and Price Elasticities on the Internet," NBER Working Papers 10570, National Bureau of Economic Research, Inc.
    5. In, Younghwan & Wright, Julian, 2014. "Loss-leader pricing and upgrades," Economics Letters, Elsevier, vol. 122(1), pages 19-22.
    6. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2000. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," NBER Working Papers 7981, National Bureau of Economic Research, Inc.
    7. Yi Qian & Qiang Gong & Yuxin Chen, 2013. "Untangling Searchable and Experiential Quality Responses to Counterfeits," NBER Working Papers 18784, National Bureau of Economic Research, Inc.
    8. David R. Bell & Christian A.L. Hilber, 2004. "An Empirical Test of the Theory of Sales: Do Household Storage Costs Affect Consumer and Store Behavior?," Working Papers 05-23, Utrecht School of Economics.
    9. Vanessa von Schlippenbach, 2008. "Complementarities, Below-Cost Pricing, and Welfare Losses," Discussion Papers of DIW Berlin 788, DIW Berlin, German Institute for Economic Research.

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