Research Note: Price Discrimination as an Adverse Signal: Why an Offer to Spread Payments May Hurt Demand

Anderson, Eric T.; Simester, Duncan I.
June 2001
Marketing Science;Summer2001, Vol. 20 Issue 3, p315
Academic Journal
Firms often search enthusiastically for distinguishing traits that they may use to price discriminate between segments. Yet there are occasions in which firms forgo the opportunity to price discriminate and instead charge a single price. Traditional explanations for why retailers forgo the opportunity to price discriminate focus on the cost of discriminating, including operational costs, explicit discrimination costs, and implicit discrimination costs. In this paper we identify an additional reason for why firms may forgo an opportunity to price discriminate. By revealing that a product is being sold to a broad range of segments, a retailer implicitly claims that the product is suitable for each segment. However, claiming that a premium-quality product is suitable for price-sensitive consumers undermines the credibility of a retailer's quality claim. The signaling explanation was motivated by extensive discussions over more than a year with a major catalog retailer that sells premium-quality jewelry and gifts. Discussions with managers revealed that they were reluctant to use any price-discrimination mechanism that signals their products are targeted at price-sensitive customers. For example, the catalog does not include sale or clearance sections and does not target more price-sensitive customers by using separate items. However, management was under some pressure to consider installment-billing offers, which allow customers to pay over a series of periods rather than in a lump sum. Management feared that offering installment billing may adversely affect customers' quality perceptions and demand. To investigate this issue, we develop a general game-theoretic model, illustrate how the model extends to installment billing, and conduct a large-scale field test. The general model illustrates how selling to multiple segments may lead to an adverse quality signal. We illustrate how the model extends to...


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