Quality Signaling Via Strikethrough Prices

Keywords

Asymmetric information; Price signaling; Sales prices

Abstract

Why do firms often advertise their current price together with their past price? Although consumers expect high quality products to have high prices, such firms may optimally charge lower prices when faced with low production costs. Thus in markets in which quality is difficult to ascertain and costs often fall over time, for example technology products, high quality firms may face a challenge of signaling their quality through current price alone. In this paper we develop a price signaling model in which uninformed consumers draw inference not only from the current price but also the prior period's price (the “strikethrough price”) if the firm chooses to disclose it. We find that a high quality firm benefits from using strikethrough pricing when the prior probability of high quality is relatively low while the probability of costs falling is relatively high.

Publication Date

9-1-2018

Publication Title

International Journal of Research in Marketing

Volume

35

Issue

3

Number of Pages

524-532

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.ijresmar.2018.03.005

Socpus ID

85044381077 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/85044381077

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