Random discounting

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Definition

Random discounting, also called variable merchandise pricing, is a strategy whereby a seller maintains a somewhat high price most of the time, discounting it significantly in a manner that is not easy to predict. This is different from a strategy of periodic discounting, where the pattern of price variation is easy for all buyers to see and adjust to.

Motivation behind random discounting

Random discounting as price discrimination: for profit

Random discounting is a form of price discrimination, more specifically third-degree price discrimination. The motivation is that:

  • The less price-sensitive customers, who are unwilling to do extensive hunting for good deals, are likely to purchase the products at a time when the price is at its usual high level.
  • The more price-sensitive customers, who are likely to spend a lot of time hunting for good deals, are likely to purchase the product at a time when the price is low. By having the low prices substantially lower, the seller seeks to attract these customers away from the competition.

Sellers are able to increase profits because price-sensitive customers generally search too much for good deals (in other words, their search costs, in terms of the opportunity cost of the time spent, is usually less than the money they save) while price-insensitive customers often spend too little time searching for good deals. Thus, sellers can maintain low prices for a very short fraction of the time and still attract most of the highly price-sensitive customers while keeping in the insensitive ones away.

Alternatives to apparent random discounting

Periodic discounting

Further information: Periodic discounting

In some cases, what appears to be random discounting

References

Journal references

Expository book references

  • The Undercover Economist by Tim Harford, 10-digit ISBN 0345494016, 13-digit ISBN 978-0345494016 (paperback)More info, Page 46-47 (section title: Mix it up!)