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The Role of Sale Signs

Author

Listed:
  • Eric T. Anderson

    (Graduate School of Business, University of Chicago, 1101 East 58th Street, Chicago, Illinois 60637)

  • Duncan I. Simester

    (Sloan School of Management, Massachusetts Institute of Technology, E56-305, 38 Memorial Drive, Cambridge, Massachusetts 02142)

Abstract

Sale signs increase demand. The apparent effectiveness of this simple strategy is surprising; sale signs are inexpensive to produce and stores generally make no commitment when using them. As a result, they can be placed on any products, and as many products, as stores prefer. If stores can place sale signs on any or all of their products, why are they effective? We offer an explanation for the effectiveness of sale signs by arguing that they inform customers about which products have relatively low prices, thus helping customers decide whether to purchase now, visit another store, or perhaps return to the same store in the future. This explanation raises two additional issues. First, why do stores prefer to place sale signs on products that are truly low priced (stores could use sale signs to increase demand for any of their products)? Second, how many sale signs should a store use; should they limit sale signs to just their relatively low priced products or should they also place them on some of their higher priced products? The paper addresses each of these questions and in doing so investigates how much information sale signs reveal. Our arguments are illustrated using a formal game-theoretic model in which competing stores sell imperfect substitutes in two-period overlapping seasons. Stores choose price and sale sign strategies and new customers arrive each period and decide whether to purchase immediately or delay and return in the future (to the same store or a different store). Customers who delay purchasing risk that the product will not be available in the following period and incur an additional transportation cost when they return. Two factors balance these costs. First, customers correctly anticipate that the price will be lower if the product is available in the next period. Second, customers who return to a different store may find a product that better suits their needs. In deciding how to respond, customers use price and sale sign cues to update their expectations about which products will be available in the next period. Stores' sale sign and price strategies are entirely endogenous in the model, as is the impact of sale signs on demand. In our discussion we highlight the information revealed by sale signs, including the source of its credibility, its sensitivity to the number of sale signs that are used, and the resulting shift in customer demand. We point to two key results. First, we show that the underlying signal is self-fulfilling: if customers believe that products with sale signs are more likely to be relatively low priced, then firms prefer to place sale signs on lower priced products. Second, we demonstrate that sale signs are self-regulating. Stores may introduce noise by placing sale signs on some more expensive products. However, if customers' price expectations are sensitive to the number of products that have sale signs, this strategy is not without cost. Using additional sale signs may reduce demand for other products that already have sale signs. Our model is unique in several respects. First, we describe how stores use multiple signals to communicate with customers and recognize that customers vary in how much they learn from each signal. Price alone resolves uncertainty for some customers, but other customers use both prices and sale signs to resolve their uncertainty. Second, although previous signaling models have recognized that signals may be noisy (not always accurate), noise in these signals is typically exogenous, resulting from uncontrolled environmental distortions. In our model, stores endogenously choose to introduce noise so that sale signs only partially reveal which products are discounted. Our explanations are supported by several examples. Although we focus on fashion products, our findings have application to any market in which customers are uncertain about relative price levels.

Suggested Citation

  • Eric T. Anderson & Duncan I. Simester, 1998. "The Role of Sale Signs," Marketing Science, INFORMS, vol. 17(2), pages 139-155.
  • Handle: RePEc:inm:ormksc:v:17:y:1998:i:2:p:139-155
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    File URL: http://dx.doi.org/10.1287/mksc.17.2.139
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    References listed on IDEAS

    as
    1. J. Jeffrey Inman & Leigh McAlister, 1993. "A Retailer Promotion Policy Model Considering Promotion Signal Sensitivity," Marketing Science, INFORMS, vol. 12(4), pages 339-356.
    2. B. Peter Pashigian & Brian Bowen, 1991. "Why Are Products Sold on Sale?: Explanations of Pricing Regularities," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1015-1038.
    3. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    4. Inman, J Jeffrey & McAlister, Leigh & Hoyer, Wayne D, 1990. " Promotion Signal: Proxy for a Price Cut?," Journal of Consumer Research, Oxford University Press, vol. 17(1), pages 74-81, June.
    5. Drew Fudenberg & Jean Tirole, 1986. "A "Signal-Jamming" Theory of Predation," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 366-376, Autumn.
    6. Pashigian, B Peter, 1988. "Demand Uncertainty and Sales: A Study of Fashion and Markdown Pricin g," American Economic Review, American Economic Association, vol. 78(5), pages 936-953, December.
    7. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
    8. Birger Wernerfelt, 1988. "Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 458-466, Autumn.
    9. Wujin Chu, 1992. "Demand Signalling and Screening in Channels of Distribution," Marketing Science, INFORMS, vol. 11(4), pages 327-347.
    10. Duncan Simester, 1995. "Signalling Price Image Using Advertised Prices," Marketing Science, INFORMS, vol. 14(2), pages 166-188.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Bogdan Genchev & Julie Holland Mortimer, 2016. "Empirical Evidence on Conditional Pricing Practices," Boston College Working Papers in Economics 908, Boston College Department of Economics.
    2. Hong Luo & Julie Holland Mortimer, 2016. "Copyright Enforcement: Evidence from Two Field Experiments," NBER Working Papers 22082, National Bureau of Economic Research, Inc.
    3. Lindsey-Mullikin, Joan & Petty, Ross D., 2011. "Marketing tactics discouraging price search: Deception and competition," Journal of Business Research, Elsevier, vol. 64(1), pages 67-73, January.
    4. Shor, Mikhael & Oliver, Richard L., 2006. "Price discrimination through online couponing: Impact on likelihood of purchase and profitability," Journal of Economic Psychology, Elsevier, vol. 27(3), pages 423-440, June.
    5. repec:eee:jouret:v:84:y:2008:i:4:p:449-460 is not listed on IDEAS
    6. Sofia Berto Villas-Boas & J. Miguel Villas-Boas, 2008. "Learning, Forgetting, and Sales," Management Science, INFORMS, vol. 54(11), pages 1951-1960, November.
    7. Li, Yongjian & Xu, Lei & Li, Dahui, 2013. "Examining relationships between the return policy, product quality, and pricing strategy in online direct selling," International Journal of Production Economics, Elsevier, vol. 144(2), pages 451-460.

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