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Discount pricing

  • Armstrong, Mark
  • Chen, Yongmin

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 merely 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: https://mpra.ub.uni-muenchen.de/39074/1/MPRA_paper_39074.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39074.

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Date of creation: May 2012
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Handle: RePEc:pra:mprapa:39074
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  1. 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.
  2. 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).
  3. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261, July.
  4. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2010. "Salience and consumer choice," Economics Working Papers 1252, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2012.
  5. C. Puppe & S. Rosenkranz, 2006. "Why Suggest Non-Binding Retail Prices?," Working Papers 06-10, Utrecht School of Economics.
  6. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  7. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
  8. repec:oup:restud:v:66:y:1999:i:3:p:555-78 is not listed on IDEAS
  9. Paul H. Rubin, 2012. "Regulation of Information and Advertising," Chapters, in: Regulation and Economics, chapter 3 Edward Elgar.
  10. Nicola Gennaioli & Alberto Martín & Stefano Rossi, 2012. "Sovereign Default, Domestic Banks and Financial Institutions," Working Papers 622, Barcelona Graduate School of Economics.
  11. Zhou, Jidong, 2008. "Reference Dependence and Market Competition," MPRA Paper 9370, University Library of Munich, Germany.
  12. 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.
  13. 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.
  14. Huanxing Yang & Lixin Ye, 2008. "Search with learning: understanding asymmetric price adjustments," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 547-564.
  15. 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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