Exploding offers and buy-now discounts

Armstrong, Mark and Zhou, Jidong (2011): Exploding offers and buy-now discounts.

Abstract

A common sales tactic is for a seller to encourage a potential customer to make her purchase decision quickly. We consider a market with sequential consumer search in which firms often encourage first-time visitors to buy immediately, 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 for immediate purchase lower than the regular price). Prices often increase when these policies are used. If firms cannot commit to their sales policy, the outcome depends on whether consumer incur an intrinsic cost of returning to a firm: if there is no such return cost, it is often an equilibrium for firms to offer a uniform price to both first-time and returning visitors; if the return cost is positive, however, firms are forced to make exploding offers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumer search; oligopoly; price discrimination; high-pressure selling; exploding offers; costly recall
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D18 - Consumer Protection; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection

References

Anderson, S., and R. Renault (1999): ``Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model,'' Rand Journal of Economics, 30(4), 719--735.

Anderson, S. and R. Renault (2009): ``Comparative Advertising: Disclosing Horizontal Match Information,'' Rand Journal of Economics, 40(3), 558--581.

Armstrong, M., J. Vickers, and J. Zhou (2009): ``Prominence and Consumer Search,'' Rand Journal of Economics, 40(2), 209--233.

Armstrong, M. and J. Zhou (2010): ``Exploding Offers and Buy-Now Discounts,'' MPRA working paper 22531.

Bone, J. (2006): The Hard Sell: An Ethnographic Study of the Direct Selling Industry. Ashgate, Aldershot, England.

Cialdini, R. (2001): Influence: Science and Practice. Allyn and Bacon, Needham Heights, USA.

Daughety, A., and J. Reinganum (1992): ``Search Equilibrium with Endogenous Recall,'' Rand Journal of Economics, 23(2), 184--202.

De los Santos, B. (2008): ``Consumer Search on the Internet,'' NET Institute Working Paper 08-15.

Diamond, P. (1971): ``A Model of Price Adjustment,'' Journal of Economic Theory, 3(2), 156--168.

Ellison, G., and A. Wolitzky} (2008): ``A Search Cost Model of Obfuscation,'' mimeo, MIT.

Fudenberg, D., and M. Villas-Boas (2006): ``Behavior-Based Price Discrimination and Customer Recognition,'' in Handbook on Economics and Information Systems, ed. by T. Hendershott, pp. 377--436. Elsevier.

Janssen, M., and A. Parakhonyak} (2010): ``Oligopolistic Search Markets with Costly Second Visits,'' mimeo.

Lewis, T., and D. Sappington (1994): ``Supplying Information to Facilitate Price Discrimination,'' International Economic Review, 35(2), 309--327.

Li, H., and S. Rosen (1998): ``Unravelling in Matching Markets,'' American Economic Review, 88(3), 371--387.

Lippman, S., and J. McCall (1976): ``The Economics of Job Search: A Survey,'' Economic Inquiry, 14(2), 155--189.

Niederle, M., and A. Roth (2009): ``Market Culture: How Rules Governing Exploding Offers Affect Market Performance,'' American Economic Journal: Microeconomics, 2(1), 199--219.

Reynolds, S., and J. Wooders (2009): ``Auctions with a Buy Price,'' Economic Theory, 38(1), 9--39.

Rotemberg, J. (2010): ``Persuasion and Empathy in Salesperson-Customer Interactions,'' mimeo, Harvard Business School.

Roth, A., and X. Xing (1994): ``Jumping the Gun: Inperfections and Institutions Related to the Timing of Market Transactions,'' American Economic Review, 84(4), 992--1044.

Stahl, D. (1989): ``Oligopolistic Pricing with Sequential Consumer Search,'' American Economic Review, 79(4), 700--712.

Wolinsky, A. (1986): ``True Monopolistic Competition as a Result of Imperfect Information,'' Quarterly Journal of Economics, 101(3), 493--511.