Discount Pricing

Mark Armstrong and Yongmin Chen

No 605, Economics Series Working Papers from University of Oxford, Department of Economics

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 mearly 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: D03 D18 D83 M3 (search for similar items in EconPapers)
Date: 2012-05-01
New Economics Papers: this item is included in nep-cta, nep-ind and nep-mkt
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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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