Discount pricing

Mark Armstrong and Yongmin Chen

MPRA Paper from University Library of Munich, Germany

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.

Keywords: reference dependence; price discounts; sales tactics; false advertising (search for similar items in EconPapers)
JEL-codes: D18 D83 M3 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-com and nep-cta
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Related works:
Journal Article: DISCOUNT PRICING (2020)
Working Paper: Discount Pricing (2017)
Working Paper: Discount Pricing (2013)
Working Paper: Discount Pricing (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:39074

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