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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 rational consumer more willing to purchase. First, a high initial price can indicate the seller has chosen to supply a high-quality product. Second, a seller with limited stock runs a clearance sale, later consumers infer that an unsold product may be poor quality, but if the initial price was higher they do not downgrade their evaluation of quality as much. In either case, if able to do so a seller has an incentive to engage in fictitious pricing, where the reported initial price is exaggerated.

Suggested Citation

  • Armstrong, Mark & Chen, Yongmin, 2017. "Discount Pricing," MPRA Paper 76681, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:76681
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    Cited by:

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    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

    Reference dependence; sales tactics; false advertising; fictitious pricing; consumer protection;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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