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Exploding offers and buy-now discounts

  • Armstrong, Mark
  • Zhou, Jidong

We consider a market with sequential consumer search in which firms can distinguish potential customers visiting for the first time from returning visitors. We show that firms often have an incentive to make it costly for its visitors to return after investigating rivals, either by making an "exploding offer" (which permits no return once the consumer leaves) or by offering a "buy-now discount" (which makes the price paid by first-time visitors lower than that for returning visitors). Prices often increase when return costs are artificially increased in this manner, and this harms consumers and market performance. If firms cannot commit to their buy-later price the outcome depends on whether there is an intrinsic cost of returning to a firm: if the intrinsic return cost is zero, it is often an equilibrium for firms not to offer any buy-now discount; if the return cost is positive, firms are forced to make exploding offers.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22531.

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Date of creation: May 2010
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Handle: RePEc:pra:mprapa:22531
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  1. Armstrong, Mark & Zhou, Jidong, 2010. "Exploding offers and buy-now discounts," MPRA Paper 22531, University Library of Munich, Germany.
  2. Lippman, Steven A & McCall, John J, 1976. "The Economics of Job Search: A Survey: Part I," Economic Inquiry, Western Economic Association International, vol. 14(2), pages 155-89, June.
  3. Simon P. Anderson & Regis Renault, 1999. "Pricing, product diversity, and search costs: a Bertrand-Chamberlin-Diamond model," Virginia Economics Online Papers 335, University of Virginia, Department of Economics.
  4. Alessandro Acquisti & Hal R. Varian, 2002. "Contidioning Prices on Purchase History," Microeconomics 0210001, EconWPA.
  5. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Prominence and consumer search," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 209-233.
  6. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
  7. John Vickers & Mark Armstrong, 2006. "Competitive Nonlinear Pricing and Bundling," Economics Series Working Papers 281, University of Oxford, Department of Economics.
  8. Wolinsky, Asher, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 493-511, August.
  9. Simon P. ANDERSON & Régis RENAULT, 2008. "Comparative Advertising: disclosing horizontal match information," THEMA Working Papers 2008-29, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  10. Babur de los Santos, 2008. "Consumer Search on the Internet," Working Papers 2008-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  11. Muriel Niederle & Alvin E. Roth, 2004. "Market Culture: How Norms Governing Exploding Offers Affect Market Performance," NBER Working Papers 10256, National Bureau of Economic Research, Inc.
  12. Armstrong, Mark & Zhou, Jidong, 2010. "Conditioning prices on search behaviour," MPRA Paper 19985, University Library of Munich, Germany.
  13. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  14. Julio J. Rotemberg, 2010. "Persuasion and empathy in salesperson-customer interactions," NBER Working Papers 15975, National Bureau of Economic Research, Inc.
  15. Muriel Niederle & Alvin E. Roth, 2009. "Market Culture: How Rules Governing Exploding Offers Affect Market Performance," American Economic Journal: Microeconomics, American Economic Association, vol. 1(2), pages 199-219, August.
  16. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-27, May.
  17. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  18. John Wooders & Stanley S. Reynolds, 2004. "Auctions with a Buy Price," Econometric Society 2004 North American Summer Meetings 130, Econometric Society.
  19. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  20. Glenn Ellison & Alexander Wolitzky, 2012. "A search cost model of obfuscation," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 417-441, 09.
  21. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  22. Andrew F. Daughety & Jennifer F. Reinganum, 1992. "Search Equilibrium with Endogenous Recall," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 184-202, Summer.
  23. Hart, Oliver D & Tirole, Jean, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 509-40, October.
  24. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
  25. Lippman, Steven A & McCall, John J, 1976. "The Economics of Job Search: A Survey," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 347-68, September.
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