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 merely 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 39074.
Date of creation: May 2012
Date of revision:
reference dependence; price discounts; sales tactics; false advertising;
Other versions of this item:
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-05 (All new papers)
- NEP-COM-2012-06-05 (Industrial Competition)
- NEP-CTA-2012-06-05 (Contract Theory & Applications)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Heidhues, Paul & Köszegi, Botond, 2005.
"The Impact of Consumer Loss Aversion on Pricing,"
CEPR Discussion Papers
4849, C.E.P.R. Discussion Papers.
- Pedro Bordado & Nicola Gennaioli & Andrei Shleifer, 2012.
"Salience and Consumer Choice,"
501, Barcelona Graduate School of Economics.
- 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.
- Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience and Consumer Choice," Working Papers 463, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience and Consumer Choice," NBER Working Papers 17947, National Bureau of Economic Research, Inc.
- Richard H. Thaler, 2008.
"Mental Accounting and Consumer Choice,"
INFORMS, vol. 27(1), pages 15-25, 01-02.
- 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.
- Kyle Bagwell & Michael Riordan, 1988.
"High and Declining Prices Signal Product Quality,"
808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Clemens Puppe & Stephanie Rosenkranz, 2011.
"Why Suggest Non‐Binding Retail Prices?,"
London School of Economics and Political Science, vol. 78(310), pages 317-329, 04.
- Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2012.
"Sovereign Default, Domestic Banks, and Financial Institutions,"
462, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Nicola Gennaioli & Alberto Mart�n & Stefano Rossi, 2012. "Sovereign Default, Domestic Banks and Financial Institutions," Working Papers 622, Barcelona Graduate School of Economics.
- Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2010. "Sovereign Default, Domestic Banks and Financial Institutions," CEPR Discussion Papers 7955, C.E.P.R. Discussion Papers.
- 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.
- Edward P. Lazear, 1984.
"Retail Pricing and Clearance Sales,"
NBER Working Papers
1446, National Bureau of Economic Research, Inc.
- Rey, Patrick & Tirole, Jean, 2007.
"A Primer on Foreclosure,"
Handbook of Industrial Organization,
- Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- Rey, Patrick & Tirole, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005.
- Zhou, Jidong, 2008.
"Reference Dependence and Market Competition,"
9370, University Library of Munich, Germany.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
- Armstrong, Mark & Zhou, Jidong, 2013.
48568, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.