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Discount Pricing

  • Armstrong, Mark
  • Chen, Yongmin

We investigate the marketing practice of framing a price as a discount from an earlier price. We discuss two reasons why a discounted price---rather than a merely low price---can make a consumer more willing to purchase. First, a high initial price can indicate the product is high quality. Second, a high initial price can signal a bargain relative to other options, and there is less incentive to search. We also discuss a behavioral model where the propensity to buy increases when others pay more. A seller has an incentive to offer false discounts, where the initial price is exaggerated.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9327.

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Date of creation: Feb 2013
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Handle: RePEc:cpr:ceprdp:9327
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  1. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience and Consumer Choice," Working Papers 463, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. 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.
  3. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  4. C. Puppe & S. Rosenkranz, 2006. "Why suggest non-binding retail prices ?," Working Papers 06-10, Utrecht School of Economics.
  5. Heidhues, Paul & Köszegi, Botond, 2005. "The Impact of Consumer Loss Aversion on Pricing," CEPR Discussion Papers 4849, C.E.P.R. Discussion Papers.
  6. Nicola Gennaioli & Alberto Mart�n & Stefano Rossi, 2012. "Sovereign Default, Domestic Banks and Financial Institutions," Working Papers 622, Barcelona Graduate School of Economics.
  7. Zhou, Jidong, 2008. "Reference Dependence and Market Competition," MPRA Paper 9370, University Library of Munich, Germany.
  8. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March.
  9. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
  10. repec:cpi:cpijrn:4.1.2008:i=5059 is not listed on IDEAS
  11. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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