Discount Pricing

Posted by D. Daniel Sokol

Mark Armstrong, Oxford - Economics and Yongmin Chen, University of Colorado at Boulder - Department of Economics analyze Discount Pricing.

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.