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Discount Pricing

Author Info

Listed author(s):
  • Mark Armstrong
  • Yongmin Chen

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 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
Handle: RePEc:oxf:wpaper:605
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Keywords: Reference dependence; Price discounts; Sales tactics; False advertising;

Other versions of this item:

Find related papers by JEL classification:
  • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
  • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
  • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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  1. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(2), pages 445-469, 08.
  2. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
  3. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, 04.
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  5. Subir Bose & Gerhard Orosel & Marco Ottaviani & Lise Vesterlund, 2006. "Dynamic monopoly pricing and herding," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 910-928, December.
  6. Jidong Zhou, 2011. "Reference Dependence and Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1073-1097, December.
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  8. repec:rje:randje:v:37:y:2006:i:4:p:910-928 is not listed on IDEAS
  9. Curtis R. Taylor, 1999. "Time-on-the-Market as a Sign of Quality," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 555-578.
  10. 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, Oxford University Press, vol. 15(1), pages 95-110, June.
  11. Huanxing Yang & Lixin Ye, 2008. "Search with learning: understanding asymmetric price adjustments," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 547-564.
  12. 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).
  13. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, July.
  14. Paul H. Rubin, 2012. "Regulation of Information and Advertising," Chapters,in: Regulation and Economics, chapter 3 Edward Elgar Publishing.
  15. Clemens Puppe & Stephanie Rosenkranz, 2011. "Why Suggest Non‐Binding Retail Prices?," Economica, London School of Economics and Political Science, vol. 78(310), pages 317-329, 04.
  16. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
  17. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
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Cited by:

  1. Mark Armstrong & Jidong Zhou, 2016. "Search Deterrence," Review of Economic Studies, Oxford University Press, vol. 83(1), pages 26-57.
  2. Fabrizi, Simona & Lippert, Steffen & Puppe, Clemens & Rosenkranz, Stephanie, 2016. "Manufacturer suggested retail prices, loss aversion and competition," Journal of Economic Psychology, Elsevier, vol. 53(C), pages 141-153.

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