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Discount pricing

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  • Armstrong, Mark
  • Chen, Yongmin

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 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.

Suggested Citation

  • Armstrong, Mark & Chen, Yongmin, 2012. "Discount pricing," MPRA Paper 39074, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39074
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    References listed on IDEAS

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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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    More about this item

    Keywords

    reference dependence; price discounts; sales tactics; false advertising;
    All these keywords.

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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