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Discount Pricing

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  • Armstrong, Mark
  • Chen, Yongmin

Abstract

We investigate the marketing practice of framing a price as a discount from an earlier price. We discuss two reasons why a discounted price---rather than a merely low price---can make a consumer more willing to purchase. First, a high initial price can indicate the product is high quality. Second, a high initial price can signal a bargain relative to other options, and there is less incentive to search. We also discuss a behavioral model where the propensity to buy increases when others pay more. A seller has an incentive to offer false discounts, where the initial price is exaggerated.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9327.

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Date of creation: Feb 2013
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Handle: RePEc:cpr:ceprdp:9327

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Keywords: consumer protection; consumer search; false advertising; price discrimination; Reference dependence;

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References

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  1. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2010. "Salience and consumer choice," Economics Working Papers 1252, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2012.
  2. Paul Heidhues & Botond Köszegi, 2004. "The Impact of Consumer Loss Aversion on Pricing," CIG Working Papers, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) SP II 2004-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  3. Clemens Puppe & Stephanie Rosenkranz, 2011. "Why Suggest Non‐Binding Retail Prices?," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 78(310), pages 317-329, 04.
  4. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2009. "Sovereign default, domestic banks and financial institutions," Economics Working Papers 1170, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2012.
  5. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, INFORMS, vol. 4(3), pages 199-214.
  6. Urbany, Joel E & Bearden, William O & Weilbaker, Dan C, 1988. " The Effect of Plausible and Exaggerated Reference Prices on Consumer Perceptions and Price Search," Journal of Consumer Research, University of Chicago Press, University of Chicago Press, vol. 15(1), pages 95-110, June.
  7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  8. Jidong Zhou, 2011. "Reference Dependence and Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1073-1097, December.
  9. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March.
  10. Paul Rubin, 2008. "Regulation of Information and Advertising," CPI Journal, Competition Policy International, vol. 4.
  11. Edward P. Lazear, 1984. "Retail Pricing and Clearance Sales," NBER Working Papers 1446, National Bureau of Economic Research, Inc.
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Cited by:
  1. Mark Armstrong & Jidong Zhou, 2013. "Search Deterrence," Economics Series Working Papers 661, University of Oxford, Department of Economics.

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