Periodic discounting

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This article describes a pricing strategy used by sellers, typically in markets that suffer from imperfect competition, significant transaction costs or imperfect information.
View other pricing strategies

Definition

Periodic discounting is a strategy whereby a seller chooses to vary the price of a good in an easy-to-predict pattern over time, done in order to maximize profits by selling to each potential buyer at a price closest to the buyer's reservation price.

A strategy such as price skimming (where the price falls steadily with time) is an example of periodic discounting.

Motivation behind periodic discounting

Periodic discounting can be viewed as a form of price discrimination. More specifically, it is a form of third-degree price discrimination involving indirect segmentation. Third-degree price discrimination refers to a strategy of using group characteristics of different kinds of consumers/buyers to try to sell the same good to them at different prices: the buyers willing to pay more end up paying more, and the buyers who would be unwilling to pay high prices can pay the lower price.

Relation with other pricing strategies

  • Random discounting: Also known as variable price merchandising, this strategy seeks to randomly vary prices so that price-sensitive customers buy the good when the price is low while price-insensitive customers tend to, on average, buy the good when the price is high.
  • Second-market discounting: This is a form of third-degree price discrimination that involves direct segmentation.

References

Journal references