Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2014

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Consumers on a Leash: Advertised Sales and Intertemporal Price Discrimination

Aniko Oery*

Last modified: 2014-04-05

Abstract


The Internet allows sellers to track “window shoppers,” consumers who look but do not buy, and to lure them back later by targeting them with an advertised sale. This new technology thus facilitates intertemporal price discrimination, but simultaneously makes it too easy for a seller to undercut her regular price. Because buyers know they could be lured back, the seller is forced to set a lower regular price. Advertising costs can, therefore, serve as a form of commitment: a seller can actually benefit if her costs of advertising increase. In this context, the impact of advertising costs on prices, profits, and welfare is analyzed using a dynamic pricing model. Furthermore, it is demonstrated how buyers' time preferences give rise to price fluctuation or an everyday-low-price in equilibrium.

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