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Exploding offers and buy-now discounts

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  • Armstrong, Mark
  • Zhou, Jidong

Abstract

We consider a market with sequential consumer search in which firms can distinguish potential customers visiting for the first time from returning visitors. We show that firms often have an incentive to make it costly for its visitors to return after investigating rivals, either by making an "exploding offer" (which permits no return once the consumer leaves) or by offering a "buy-now discount" (which makes the price paid by first-time visitors lower than that for returning visitors). Prices often increase when return costs are artificially increased in this manner, and this harms consumers and market performance. If firms cannot commit to their buy-later price the outcome depends on whether there is an intrinsic cost of returning to a firm: if the intrinsic return cost is zero, it is often an equilibrium for firms not to offer any buy-now discount; if the return cost is positive, firms are forced to make exploding offers.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22531.

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Date of creation: May 2010
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Handle: RePEc:pra:mprapa:22531

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Keywords: Consumer search; oligopoly; price discrimination; high-pressure selling; buy-now discounts; costly recall;

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References

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  1. Niederle, Muriel & Roth, Alvin E., 2009. "Market Culture: How Rules Governing Exploding Offers Affect Market Performance," Scholarly Articles 11077571, Harvard University Department of Economics.
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Citations

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Cited by:
  1. Mark Armstrong & Jidong Zhou, 2011. "Exploding Offers and Buy-Now Discounts," Working Papers 11-18, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Maarten Janssen & Alexei Parakhonyak, 2014. "Consumer search markets with costly revisits," Economic Theory, Springer, vol. 55(2), pages 481-514, February.
  3. Jason Allen & Robert Clark & Jean-François Houde, 2012. "Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market," Working Papers 12-30, Bank of Canada.
  4. Zhou, Jidong, 2011. "Multiproduct search," MPRA Paper 37139, University Library of Munich, Germany.
  5. Philippe Choné & Romain De Nijs & Lionel Wilner, 2012. "Intertemporal Pricing with Unobserved Consumer Arrival Times," Working Papers 2012-23, Centre de Recherche en Economie et Statistique.

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