When Retailing and Las Vegas Meet: Probabilistic Free Price Promotions
Management Science, Forthcoming
18 Pages Posted: 27 Jul 2015 Last revised: 10 Mar 2016
Date Written: March 10, 2016
A number of retailers offer gambling or lottery type of price promotions with a chance to receive one’s entire purchase for free. While these retailers seem to share the intuition that probabilistic free price promotions are attractive to consumers, it is unclear how they compare to traditional sure price promotions of equal expected monetary value. We compared these two risky and sure price promotions for planned purchases across six experiments in the field and in the lab. Together, we found that consumers are not only more likely to purchase a product promoted with a probabilistic free discount over the same product promoted with a sure discount but that they are also likely to purchase more of it. This preference seems to be primarily due to a diminishing sensitivity to the prices. In addition, we find that the zero price effect, transaction cost, and novelty considerations are likely not implicated.
Keywords: discount, marketing, pricing, judgment and decision making, consumer behavior, perception, gamble, uncertainty, prospect theory, probability weighting, value, Weber-Fechner
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