Consumers on a Leash: Advertised Sales and Intertemporal Price Discrimination

45 Pages Posted: 20 Jul 2016

See all articles by Aniko Oery

Aniko Oery

Yale University - Cowles Foundation

Date Written: July 12, 2016

Abstract

The Internet allows sellers to track “window shoppers,” consumers who look but do not buy, and to lure them back later by targeting them with an advertised sale. This new technology thus facilitates intertemporal price discrimination, but simultaneously makes it too easy for a seller to undercut her regular price. Because buyers know they could be lured back, the seller is forced to set a lower regular price. Advertising costs can, therefore, serve as a form of commitment: a seller can actually benefit from higher costs of advertising. Based on this framework, the impact of commitment on prices, profits, and welfare are analyzed using a dynamic pricing model. Furthermore, it is demonstrated how buyers’ time preferences give rise to price fluctuation or an everyday-low-price in equilibrium.

Keywords: Advertising, Coases conjecture, commitment, dynamic pricing, intertemporal price discrimination, online markets, everyday-low-pricing

JEL Classification: D11, D21, D42, D90, L11, L12

Suggested Citation

Oery, Aniko, Consumers on a Leash: Advertised Sales and Intertemporal Price Discrimination (July 12, 2016). Cowles Foundation Discussion Paper No. 2047. Available at SSRN: https://ssrn.com/abstract=2811821 or http://dx.doi.org/10.2139/ssrn.2811821

Aniko Oery (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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