Working Paper: CEPR ID: DP9327
Authors: Mark Armstrong; Yongmin Chen
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.
Keywords: consumer protection; consumer search; false advertising; price discrimination; reference dependence
JEL Codes: D03; D18; D83; M3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high initial price (D41) | increased consumer willingness to purchase (D12) |
| high initial price (D41) | perceived quality (L15) |
| perceived quality (L15) | increased consumer willingness to purchase (D12) |
| perceived bargain (D46) | increased purchases (E20) |
| framing of price as a discount (H43) | perceived bargain (D46) |
| misleading pricing practices (L42) | consumer behavior (D19) |
| regulatory regime (K23) | consumer purchasing decisions (D12) |
| consumer trust (D18) | strength of pricing strategies impact (L11) |
| regulatory environment (G38) | strength of pricing strategies impact (L11) |