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Discount Pricing

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  • Armstrong, Mark
  • Chen, Yongmin

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.

Suggested Citation

  • Armstrong, Mark & Chen, Yongmin, 2013. "Discount Pricing," CEPR Discussion Papers 9327, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9327
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    Cited by:

    1. Mark Armstrong & Jidong Zhou, 2016. "Search Deterrence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 26-57.
    2. Fabrizi, Simona & Lippert, Steffen & Puppe, Clemens & Rosenkranz, Stephanie, 2016. "Manufacturer suggested retail prices, loss aversion and competition," Journal of Economic Psychology, Elsevier, vol. 53(C), pages 141-153.

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    More about this item

    Keywords

    Consumer protection; Consumer search; False advertising; Price discrimination; Reference dependence;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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