Discount Pricing
40 Pages Posted: 5 Feb 2013
Date Written: February 2013
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 consumer more willing to purchase. First, a high initial price can indicate the product is high quality. Second, a high initial price can signal a bargain relative to other options, and there is less incentive to search. We also discuss a behavioral model where the propensity to buy increases when others pay more. A seller has an incentive to offer false discounts, where the initial price is exaggerated.
Keywords: consumer protection, consumer search, false advertising, price discrimination, Reference dependence
JEL Classification: D03, D18, D83, M3
Suggested Citation: Suggested Citation
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