DP9327 Discount Pricing

Author(s): Mark Armstrong, Yongmin Chen
Publication Date: February 2013
Keyword(s): consumer protection, consumer search, false advertising, price discrimination, Reference dependence
JEL(s): D03, D18, D83, M3
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9327

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.