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Discount Pricing

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  • Mark Armstrong
  • Yongmin Chen

Abstract

This paper investigates discount pricing, the common marketing practice whereby a price is listed as a discount from an earlier, or regular, price.� We discuss two reasons why a discounted price - as opposed to a mearly low price - can make a rational consumer more willing to purchase the item.� First, the information that the product was initially sold at a high price can indicate the product is high quality.� Second, a discounted price can signal that the product is an unusual bargain, and there is little point searching for lower prices.� We also discuss a behavioral model in which consumers have an intrinsic preference for paying a below-average price.� Here, a seller has an incentive to offer different prices to identical consumers, so that a proportion of its consumers enjoy a bargain.� We discuss in each framework when a seller has an incentive to offer false discounts, in which the reference price is exaggerated.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 605.

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Date of creation: 01 May 2012
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Handle: RePEc:oxf:wpaper:605

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Keywords: Reference dependence; Price discounts; Sales tactics; False advertising;

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References

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  1. Paul Heidhues & Botond Köszegi, 2004. "The Impact of Consumer Loss Aversion on Pricing," CIG Working Papers SP II 2004-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  2. Jidong Zhou, 2011. "Reference Dependence and Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1073-1097, December.
  3. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
  4. Clemens Puppe & Stephanie Rosenkranz, 2011. "Why Suggest Non‐Binding Retail Prices?," Economica, London School of Economics and Political Science, vol. 78(310), pages 317-329, 04.
  5. 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.
  6. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, 04.
  7. Paul Rubin, 2008. "Regulation of Information and Advertising," CPI Journal, Competition Policy International, vol. 4.
  8. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  9. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. 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, vol. 15(1), pages 95-110, June.
  11. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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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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