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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: http://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. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261, March.
  2. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  3. Jidong Zhou, 2011. "Reference Dependence and Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1073-1097, December.
  4. C. Puppe & S. Rosenkranz, 2006. "Why suggest non-binding retail prices ?," Working Papers 06-10, Utrecht School of Economics.
  5. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, . "Salience and Consumer Choice," Working Paper 62321, Harvard University OpenScholar.
  6. Nicola Gennaioli & Alberto Mart�n & Stefano Rossi, 2012. "Sovereign Default, Domestic Banks and Financial Institutions," Working Papers 622, Barcelona Graduate School of Economics.
  7. 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.
  8. 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.
  9. 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.
  10. Edward P. Lazear, 1984. "Retail Pricing and Clearance Sales," NBER Working Papers 1446, National Bureau of Economic Research, Inc.
  11. repec:cpi:cpijrn:4.1.2008:i=5059 is not listed on IDEAS
  12. Heidhues, Paul & Köszegi, Botond, 2005. "The Impact of Consumer Loss Aversion on Pricing," CEPR Discussion Papers 4849, C.E.P.R. Discussion Papers.
  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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