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Discount pricing

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  • Armstrong, Mark
  • Chen, Yongmin

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 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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39074.

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Date of creation: May 2012
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Handle: RePEc:pra:mprapa:39074

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Keywords: reference dependence; price discounts; sales tactics; false advertising;

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References

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  1. C. Puppe & S. Rosenkranz, 2006. "Why suggest non-binding retail prices ?," Working Papers, Utrecht School of Economics 06-10, Utrecht School of Economics.
  2. Paul Rubin, 2008. "Regulation of Information and Advertising," CPI Journal, Competition Policy International, vol. 4.
  3. 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).
  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. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  6. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Consumer Choice," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 121(5), pages 803 - 843.
  7. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
  8. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, INFORMS, vol. 4(3), pages 199-214.
  9. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Zhou, Jidong, 2008. "Reference Dependence and Market Competition," MPRA Paper 9370, University Library of Munich, Germany.
  11. 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.
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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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