Discount Pricing

Armstrong, Mark and Chen, Yongmin (2017): Discount Pricing.

Abstract

We investigate the marketing practice of framing a price as a discount from an earlier price. We discuss two reasons why a discounted price---rather than a merely low price---can make a rational consumer more willing to purchase. First, a high initial price can indicate the seller has chosen to supply a high-quality product. Second, a seller with limited stock runs a clearance sale, later consumers infer that an unsold product may be poor quality, but if the initial price was higher they do not downgrade their evaluation of quality as much. In either case, if able to do so a seller has an incentive to engage in fictitious pricing, where the reported initial price is exaggerated.

• Item Type: MPRA Paper
• Language: English
• Keywords: Reference dependence, sales tactics, false advertising, fictitious pricing, consumer protection
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M31 - Marketing; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M37 - Advertising

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