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- Title
DISCOUNT PRICING.
- Authors
Armstrong, Mark; Chen, Yongmin
- Abstract
We investigate the practice of framing a price as a discount from an earlier price, with information such as "was $200, now $100." 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 seller has chosen to supply a high‐quality product. Second, when a seller with limited stock runs a clearance sale, later consumers infer that unsold stock has higher expected quality when its initial price was higher. We also suggest a behavioral explanation, which is that consumers with reference‐dependence preferences are more likely to buy if they perceive the price as a bargain relative to the earlier price. Discount pricing is therefore an effective marketing technique, and a seller may wish to deceive potential customers by offering a false discount. The welfare effects of regulation to prevent fictitious pricing are subtle, with potential unintended consequences, and depend on whether consumers are sophisticated or naive.
- Subjects
CONSUMER price indexes; PURCHASING; SPECIAL sales; DISCOUNT prices; CONSUMERS
- Publication
Economic Inquiry, 2020, Vol 58, Issue 4, p1614
- ISSN
0095-2583
- Publication type
Article
- DOI
10.1111/ecin.12774