Regular Price Research Articles

Gambled Price Discounts: A Remedy to the Negative Side Effects of Regular Price Discounts

In the context of price discounts, a special type of price promotion, in which savings depend on the outcome of a gamble and are thus uncertain, has recently achieved some popularity. The question arises as to whether such gambled price discounts (GPDs) incur the negative reference price effect—that is, a downward shift in customers’ internal reference price (IRP)—which is often associated with regular price discounts (RPDs). From several studies, including two longitudinal field experiments, the authors find that GPDs indeed alleviate the negative reference price effect: IRPs and actual repurchasing tend to be lower for RPDs than for GPDs and a no-discount control condition. Moreover, the authors explore the psychological underpinnings of these effects and show that the different consequences of GPDs versus RPDs on IRPs are more pronounced if information regarding product quality is limited. The authors demonstrate that findings are robust to variations of GPD discount levels and the probability of winning.

Prices are sticky after all

Economists have interpreted the evidence that prices change every four months as implying that sticky prices cannot be important for monetary transmission. Theory implies that this interpretation is correct if most price changes are regular, but not if a large fraction are temporary, as in the data. Since regular prices are much stickier than temporary ones, our models predict that the stickiness of the aggregate price level matches that in a standard Calvo model or a standard menu cost model in which micro-level prices change about once a year. In this sense, prices are sticky after all.

Evaluating the potential effects from probabilistic selling of similar products

AbstractIn this article, we consider an online retailer who sells two similar products (A and B) over a finite selling period. Any stock left at the end of the period has no value (like clothes going out of fashion at the end of a season). Aside from selling the products at regular prices, he may offer an additional option that sells a probabilistic good, “A or B,” at a discounted price. Whenever a customer buys a probabilistic good, he needs to assign one of the products for the fulfillment. Considering the choice behavior of potential customers, we model the problem using continuous‐time, discrete‐state, finite‐horizon dynamic programming. We study the optimal admission decisions and devise two scenarios, whose value functions can be used as benchmarks to evaluate the demand induction effect and demand dilution effect of probabilistic selling (PS). We further investigate an extension of the base MDP (Markov Decision Process) model in which the fulfillment of probabilistic sales is uncontrollable by the retailer. A special case of the extended model can be used as a benchmark to quantify the potential inventory pooling effect of PS. Finally, numerical experiments are conducted to evaluate the overall profit improvement, and the effects from adopting the PS strategy. © 2014 Wiley Periodicals, Inc. Naval Research Logistics, 61: 604–620, 2014

Online Cashback Affiliate: A New Promotional Pricing Model

This paper examines the economic impact of the online cashback model on e-businesses’ pricing strategies. Through reimbursing a portion of the transactional amount to consumers in a form of cashback, online merchants are able to exercise third-degree price discrimination by offering two asymmetric prices via a digital dual channel. Despite some similarities, cashback differs from other promotional vehicles in many aspects. The main distinction, from an economic perspective, is that the presence of the intermediary moderates the merchant’s market power and thus poses an adverse effect on the profitability of discriminating. To better understand such a novel pricing mechanism, we develop a game theoretical model and start our analyses with a market consisting of one merchant, one affiliate and consumers heterogeneous in their product valuation. From a price view, the mechanism appears to offer cashback users an attractive deal since the post-cashback price they pay is perceived lower than the regular price faced by non-users. Under some conditions, however, such a seemingly “low” price is actually “high” as compared to the uniform price when the merchant does not price-discriminate. An important implication is that all consumers may end up suffering from higher prices in the presence of cashback deals. This finding defies a common intuition that a discriminating firm should raise the price for some consumers but lower the price for the others. We also develop two extensions to seek explanations behind various industry practices. Our results, consistent with several real-world observations, have useful managerial implications for e-business practitioners.

Advance booking discount in the presence of spot market

We consider a risk-neutral firm that can procure raw material via long-term contract as well as in spot market, using the material as a one-to-one input to produce a seasonal product and selling it in the customer market. The firm can use the advance booking discount (ABD) program to entice customers to place their orders prior to the selling season. The ABD program provides an opportunity for the firm to update its understanding of the regular demand and spot price. We separately analyse two cases: (NI) no information updating and (IU) information updating cases. In each case, we derive the optimal discount pricing strategy and corresponding expected profit of the firm. By comparing them, we investigate the value of information updating obtained from the pre-committed order. Among others, our study finds that if the product has a relatively high profit margin, or a low profit margin where the raw material spot price is more sensitive to the trading volume, it is optimal for the firm to implement the discount strategy. The optimal discount coefficient in the IU case is never lower than in the NI case. We further find that the optimal discount coefficient in the NI case decreases in spot market volatility; however, it increases in spot market volatility if and only if the firm’s market share is larger than half of the total market demand in the IU case.

Multiproduct Retailing

We study the pricing behaviour of a multiproduct firm, when consumers must pay a search cost to learn its prices. Equilibrium prices are high, because consumers understand that visiting a store exposes them to a hold-up problem. However, a firm with more products charges lower prices, because it attracts consumers who are more price sensitive. Similarly, when a firm advertises a low price on one product, consumers rationally expect it to charge somewhat lower prices on its other products as well. We therefore find that having a large product range, and advertising a low price on one product, are substitute ways of building a “low-price image”. Finally, we show that in a competitive setting each product has a high regular price, with firms occasionally giving random discounts that are positively correlated across products.

A comparison of regular price cycles in gasoline and liquefied petroleum gas

Regular and asymmetric gasoline price cycles are observed in a number of countries. While most studies found that such price cycles are well characterized by the theoretical Edgeworth price cycle, some studies suggest alternative explanations. This paper contributes to this literature by being the first to compare regular price cycles in a nongasoline product—liquefied petroleum gas (LPG)—with gasoline price cycles. Our main finding is that LPG price cycles in the Perth area of Western Australia are much longer and more asymmetric than gasoline price cycles in the same market. This finding is consistent with Noel's (2008) prediction that Edgeworth cycles are longer and more asymmetric when aggregate demand is more elastic—the aggregate demand for LPG is presumably more elastic than the demand for gasoline.

Effects of a price increase on purchases of sugar sweetened beverages. Results from a randomized controlled trial

Sugar sweetened beverage (SSB) taxes are receiving increased political interest. However, there have been no experimental studies of the effects of price increases on SSBs or the effects on close substitutes such as diet drinks, alcohol or sugary snacks. Therefore, the aim of this study was to examine the effects of a price increase on SSBs on beverage and snack purchases using a randomized controlled design within a three-dimensional web-based supermarket. The trial contained two conditions: experimental condition with a 19% tax on SSBs (to reflect an increase in Dutch value added tax from 6% to 19%); and a control condition with regular prices. N = 102 participants were randomized and purchased groceries on a single occasion at a three-dimensional Virtual Supermarket. Data were analysed using independent t-tests and regression analysis. Results showed that participants in the price increase condition purchased significantly less SSBs than the control group (B = −.90; 95% CI = −1.70 to −.10 L per household per week). There were no significant effects on purchases in other beverage or snack food categories. This means that the higher VAT rate was effective in reducing SSB purchases and had no negative side-effects.

Food prices and food shopping decisions of black women

Identifying food pricing strategies to encourage purchases of lower-calorie food products may be particularly important for black Americans. Black children and adults have higher than average obesity prevalence and disproportionate exposure to food marketing environments in which high calorie foods are readily available and heavily promoted. The main objective of this study was to characterize effects of price on food purchases of black female household shoppers in conjunction with other key decision attributes (calorie content/healthfulness, package size, and convenience). Factorial discrete choice experiments were conducted with 65 low- and middle-/higher-income black women. The within-subject study design assessed responses to hypothetical scenarios for purchasing frozen vegetables, bread, chips, soda, fruit drinks, chicken, and cheese. Linear models were used to estimate the effects of price, calorie level (or healthfulness for bread), package size, and convenience on the propensity to purchase items. Moderating effects of demographic and personal characteristics were assessed. Compared with a price that was 35% lower, the regular price was associated with a lesser propensity to purchase foods in all categories (β = −0.33 to −0.82 points on a 1 to 5 scale). Other attributes, primarily calorie content/healthfulness, were more influential than price for four of seven foods. The moderating variable most often associated with propensity to pay the regular versus lower price was the reported use of nutrition labels. Price reductions alone may increase purchases of certain lower-calorie or more healthful foods by black female shoppers. In other cases, effects may depend on combining price changes with nutrition education or improvements in other valued attributes.

Price Number Relationships and Deal Processing Fluency: The Effects of Approximation Sequences and Number Multiples

This research investigates how the relationships among pieces of numerical information in a price promotional offer (i.e., regular price, sale price, absolute discount, and relative discount) affect deal processing fluency. Across four studies (including a field study involving purchase data collected from an online group-buying website), the authors show that when the numbers constitute an approximation sequence or are multiples of one another, deal processing fluency is increased, which influences deal liking and ultimately has an impact on consumers’ price promotion predilection. In addition, this article demonstrates that when consumers are not highly motivated to process numerical information, they may choose deals that offer less economic value but feature a combination of numbers that they can more fluently process. This research has important implications for the type of numerical information marketers should include in price promotional offers.

Regular prices and sales

We study the properties of a prot-maximizing monopolist’s optimal price distribution when selling to a loss-averse consumer, where (following K} oszegi and Rabin (2006)) we assume that the consumer’s reference point is her recent rational expectations about the purchase. If it is close to costless for the consumer to observe the realized price of the product, then|in a pattern consistent with several recently documented facts regarding supermarket pricing|the monopolist chooses low and variable \sale prices with some probability and a high and sticky \regular price with the complementary probability. Realizing that she will buy at the sale prices and hence that she will purchase with positive probability, the consumer chooses to avoid the painful uncertainty in whether she will get the product by buying also at the regular price. If it is more costly for the consumer to observe the realized price, then|in a pattern consistent with the pricing behavior of some other retailers (e.g. movie theaters)|the monopolist chooses a sticky price and holds no sales. In this case, a sale is less tempting and hence less eective in generating an expectation to purchase with positive probability. We also show that exante competition for loyal consumers leads to sticky pricing while ex-post competition leads to marginal-cost pricing, and discuss several other extensions of the model.

Behavioral Anomalies in Consumer Wait-or-Buy Decisions and Their Implications for Markdown Management

A decision to buy an item at a regular price or wait for a possible markdown involves a multi-dimensional trade-off between the value of the item, the delay in getting it, the likelihood of getting it, and the magnitude of the price discount. Such trade-offs are prone to behavioral anomalies by which human decision makers deviate from the discounted expected utility model. We build an axiomatic preference model that accounts for three well-known anomalies, and produces a parsimonious generalization of discounted expected utility. We then plug this behavioral model into a Stackelberg-Nash game between a firm that decides the price discount and a continuum of consumers who decide to wait or buy, anticipating other consumers' decisions and the resultant likelihood of product availability. We solve the markdown management problem and contrast the results of our model with those under discounted expected utility. We analytically show that accounting for the behavioral anomalies can result in larger markdowns and higher revenues. Finally, we calibrate our model via a laboratory experiment, and validate its predictions out-of-sample.

Micro Price Dynamics during Japan's Lost Decades

We study micro price dynamics and their macroeconomic implications using daily scanner data from 1988 to 2013. We provide five facts. First, posted prices in Japan are ten times as flexible as those in the US scanner data. Second, regular prices are almost as flexible as those in the USA and Euro area. Third, the heterogeneity of frequency and size of price change across products is sizable and maintained throughout the sample period. Fourth, during Japan's lost decades, temporary sales have played an increasingly important role in households' consumption expenditure. Fifth, the frequency of upward regular price revisions and the frequency of sales are significantly correlated with the macroeconomic environment, in particular indicators associated with a labor market, while other components of price changes are not.

Risks, prices, and positions: A social network analysis of illegal drug trafficking in the world-economy

BackgroundIllegal drug prices are extremely high, compared to similar goods. There is, however, considerable variation in value depending on place, market level and type of drugs. A prominent framework for the study of illegal drugs is the “risks and prices” model (Reuter & Kleiman, 1986). Enforcement is seen as a “tax” added to the regular price. In this paper, it is argued that such economic models are not sufficient to explain price variations at country-level. Drug markets are analysed as global trade networks in which a country's position has an impact on various features, including illegal drug prices. MethodologyThis paper uses social network analysis (SNA) to explain price markups between pairs of countries involved in the trafficking of illegal drugs between 1998 and 2007. It aims to explore a simple question: why do prices increase between two countries? Using relational data from various international organizations, separate trade networks were built for cocaine, heroin and cannabis. Wholesale price markups are predicted with measures of supply, demand, risks of seizures, geographic distance and global positioning within the networks. Reported prices (in $US) and purchasing power parity-adjusted values are analysed. ResultsDrug prices increase more sharply when drugs are headed to countries where law enforcement imposes higher costs on traffickers. The position and role of a country in global drug markets are also closely associated with the value of drugs. Price markups are lower if the destination country is a transit to large potential markets. Furthermore, price markups for cocaine and heroin are more pronounced when drugs are exported to countries that are better positioned in the legitimate world-economy, suggesting that relations in legal and illegal markets are directed in opposite directions. ConclusionConsistent with the world-system perspective, evidence is found of coherent world drug markets driven by both local realities and international relations.

Micro Price Dynamics During Japan's Lost Decades

We study micro price dynamics and their macroeconomic implications using daily scanner data from 1988 to 2013. We provide five facts. First, posted prices in Japan are ten times as flexible as those in the U.S. scanner data. Second, regular prices are almost as flexible as those in the U.S. and Euro area. Third, the heterogeneity of frequency and size of price change across products is sizable and maintained throughout the sample period. Fourth, during Japan's lost decades, temporary sales have played an increasingly important role in households' consumption expenditure. Fifth, the frequency of upward regular price revisions and the frequency of sales are significantly correlated with the macroeconomic environment in particular indicators associated with a labor market while other components of price changes are not.

A Study on Multi-Period Inventory Clearance Pricing in Consideration of Consumer's Reference Price Effect

It is difficult to determine an appropriate discount price for daily perishable products to increase profit from a longterm standpoint. Even if the discount pricing is efficient to increase profit of the day, consumers memorize the sales price and they might hesitate to purchase the product at a regular price the following day. The authors discussed the inventory clearance pricing for a single period in our previous study by constructing a mathematical model to derive an optimal sales price to maximize the expected profit by considering the reference price effect of demand. This paper extends the discussion to handle the discount pricing for multiple periods. A mathematical analysis is first conducted to reveal the properties on an objective function, which is the present value of total expected profits for multiple periods. An algorithm is then proposed to derive an optimal price for asymmetric consumers. Numerical experiments investigate the characteristics of the objective function and optimal pricings.

An EOQ model for perishable product with special sale and shortage

Abstract In this paper, for the first time, an inventory control model to determine the optimal order and shortage quantities of a perishable item when the supplier offers a special sale is developed. Four possible cases based on decision that the purchaser might make about the first replenishment policy (using regular economic order quantity model at reduced price or regular price), if he did not take the special order, and coincidence of special period length with positive or negative inventory level of the last regular period length during the special period, are investigated. Moreover several useful theorems are suggested through which one can find closed-form solution directly when there are integer operators involved in an objective function. At the end, in order to illustrate the proposed theorems and the solution method some numerical examples are solved and a sensitivity analysis is reported too.

Pricing in position auctions and online advertising

Can search engines increase revenues by changing their position auctions? In this paper, I analyze position auctions with general pricing rules to answer this question. In these auctions, there are several items that are commonly ranked by bidders with unit demand. I show that revenues remain the same for position auctions with regular pricing rules where the price for an item depends on the bids of agents who win lower-ranked items. In addition, all of the bidders also have the same ex post payo ffs. I also show that regularity is a necessary condition to get ex post payoff equivalence.

The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications

We study the cyclical properties of sales, regular price changes, and average prices paid by consumers (“effective” prices) using data on prices and quantities sold for numerous retailers across many US metropolitan areas. Inflation in the effective prices paid by consumers declines significantly with higher unemployment while little change occurs in the inflation rate of prices posted by retailers. This difference reflects the reallocation of household expenditures across retailers, a feature of the data which we document and quantify, rather than sales. We propose a simple model with household store-switching and assess its implications for business cycles and policymakers. (JEL D12, E31, E32, L25, L81)

What is Special about Marketing Organic Products? How Organic Assortment, Price, and Promotions Drive Retailer Performance

Higher sales and margins are key goals for retailers promoting emerging products, such as organics, but little is known about their marketing effectiveness and their cross-effects on conventional product sales. Extant research reports conflicting results about price and promotional sensitivity for organic products and does not address the impact of organic assortment. This article calculates long-term own- and cross-elasticities of organic and conventional product sales in response to changes in assortment, price, and promotions. Using a rich data set of 56 categories, the authors test hypotheses on how different costs and benefits of organic products affect these elasticities. They find that enduring actions, such as assortment and regular price changes, have a higher elasticity for organics than for conventional products. In contrast with common wisdom, even “core” organic consumers are sensitive to these actions. Increasing organic assortment and promotion breadth yields higher profits for the total category, as do more frequent promotions on conventional products. The category comparison yields specific advice with regard to where larger assortment and lower prices versus more and deeper promotions are most effective.