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Discount Pricing

  • Mark Armstrong
  • Yongmin Chen

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 mearly 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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File URL: http://www.economics.ox.ac.uk/materials/papers/5819/paper605.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 605.

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Date of creation: 01 May 2012
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Handle: RePEc:oxf:wpaper:605
Contact details of provider: Postal: Manor Rd. Building, Oxford, OX1 3UQ
Web page: http://www.economics.ox.ac.uk/
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  1. Jidong Zhou, 2011. "Reference Dependence and Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1073-1097, December.
  2. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
  3. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience and Consumer Choice," NBER Working Papers 17947, National Bureau of Economic Research, Inc.
  4. Spiegler, Ran, 2011. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780195398717, March.
  5. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  6. Paul Heidhues & Botond Köszegi, 2004. "The Impact of Consumer Loss Aversion on Pricing," CIG Working Papers SP II 2004-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  7. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2010. "Sovereign Default, Domestic Banks and Financial Institutions," CEPR Discussion Papers 7955, C.E.P.R. Discussion Papers.
  8. 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.
  9. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. C. Puppe & S. Rosenkranz, 2006. "Why suggest non-binding retail prices ?," Working Papers 06-10, Utrecht School of Economics.
  11. Taylor, Curtis R, 1999. "Time-on-the-Market as a Sign of Quality," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 555-78, July.
  12. Paul H. Rubin, 2012. "Regulation of Information and Advertising," Chapters, in: Regulation and Economics, chapter 3 Edward Elgar.
  13. 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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