Dealing-Temporary Price Cuts-By Seller as a Buyer Discrimination Mechanism

Abstract

This paper is concerned with temporary price cuts (deals, sales, and specials) as a mechanism for the seller to price-discriminate between buyers with different intensities of demand. We analyze why a seller offers such price cuts, which buyers take advantage of them, and what the parameters are that determine the amount and frequency of the discount offered. In the remainder of this section, we briefly review the literature on price deals. 1 In section II, simple models of buyer and seller behavior are developed, and we show why and how a seller adopts a dealing strategy. Section III summarizes the key implications of the model and indicates how the price discrimination hypothesis could be tested in practice. Section IV suggests possible extensions of the model. Finally, Section V gives our conclusions. In the marketing literature, the issue of who is deal prone has been extensively researched An explanation for temporary price cuts, usually called deals, sales, or specials, is provided. We hypothesize that they are a mechanism that discriminates between more intense and less intense demanders. We further hypothesize a positive relationship between demand elasticity and holding costs. Buyers with more intense demand, with high holding costs, are those who will be buying the product at its regular price. The low-holdingcost buyers take advantage of deals by forward buying. The model is applicable to three relationships: (1) manufacturer-reseller, where the reseller may be a wholesaler or a retailer; (2) resellerreseller, for example, wholesaler-retailer; and (3) retailer-consumer. * We are grateful to Michael Mussa and Albert Madansky for their comments. We also benefited from comments made by the marketing faculty of the Wharton School at a seminar where an earlier version of this paper was presented. Neil Beckwith in particular is acknowledged. 1. For a more detailed review of deals and similar pricecutting mechanisms, e.g., mail-in rebates, cents-off labels, coupons. etc.. see Narsimhan (1982, chan. 2). (Journal of Business, 1985, vol. 58, no. 3) ? 1985 by The University of Chicago. All rights reserved. 0021-9398185/5803-0004$01 .50