AbstractThis 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 InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 605.
Date of creation: 01 May 2012
Date of revision:
Reference dependence; Price discounts; Sales tactics; False advertising;
Other versions of this item:
- D03 - Microeconomics - - General - - - Behavioral Economics; Underlying Principles
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-05 (All new papers)
- NEP-CTA-2012-06-05 (Contract Theory & Applications)
- NEP-IND-2012-06-05 (Industrial Organization)
- NEP-MKT-2012-06-05 (Marketing)
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