Discussion paper

DP9327 Discount Pricing

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.


Armstrong, M and Y Chen (2013), ‘DP9327 Discount Pricing‘, CEPR Discussion Paper No. 9327. CEPR Press, Paris & London. https://cepr.org/publications/dp9327