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Title: Discount Pricing

Author(s): Mark Armstrong and Yongmin Chen

Publication Date: February 2013

Keyword(s): consumer protection, consumer search, false advertising, price discrimination and Reference dependence

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Armstrong, M and Chen, Y. 2013. 'Discount Pricing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9327