Motivating Discounts: Price Motivated Reasoning

Abstract:     
The behavioral implications of large discounts have been viewed from two opposing perspectives. From an attribution perspective, a large discount signals low quality and decreases the overall appeal of the product, but from a motivational account, a large discount seems attractive and increases the overall appeal of the product. We demonstrate the existence of both accounts, and suggest that the motivated reasoning account triumphs when the intrinsic attraction is high enough. We thus suggest that given the overwhelming amount of uncertainty in product fit and consumption benefits, consumers' beliefs regarding the reason for a discount may depend on their motivational states. On a theoretical level, the current work is amongst the first to use psychological theories to propose some structure for the belief formation processes in price signaling models.

Keywords: pricing, motivated reasoning, signaling, discounts, promotions

JEL Classifications: D1, D11, D4, L11, M3, M30, M31

Working Paper Series