Discount Pricing

40 Pages Posted: 5 Feb 2013

See all articles by Mark Armstrong

Mark Armstrong

University of Oxford

Yongmin Chen

University of Colorado at Boulder - Department of Economics

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

Armstrong, Mark and Chen, Yongmin, Discount Pricing (February 2013). CEPR Discussion Paper No. DP9327, Available at SSRN: https://ssrn.com/abstract=2212003

Mark Armstrong (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Yongmin Chen

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
303-492-8736 (Phone)
303-492-8960 (Fax)

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