Discount pricing

Armstrong, Mark and Chen, Yongmin (2012): Discount pricing.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: reference dependence; price discounts; sales tactics; false advertising
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D18 - Consumer Protection; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness

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