Pricing cues and retail competition

Abstract

Retailers that do not consistently display pricing cues (e.g., “Save $200″) may face lower demand from consumers who do not benefit from the additional transaction utility, a fact that is well-documented in the extant literature. This study investigates why some retailers choose not to display pricing cues despite these documented benefits, how optimal prices are affected by the display of pricing cues, and which type of retailer – service-focused or price-focused – is more likely to display pricing cues.

Analysis of our analytical model of competing retailers with asymmetric sales support reveals two effects of pricing-cue display: a “direct-demand effect” and a “competitive effect.” We find that when both retailers display a pricing cue, they can charge a higher price due to the increased transaction utility provided to customers (“direct-demand effect”). However, in the asymmetric scenario, when only one retailer displays a pricing cue, it has the additional effect of lowering the price of the non-displaying retailer (“competitive effect”). Further, we find that the price dispersion is higher when a service-focused retailer displays a pricing cue and the competing price-focused retailer does not, leading that case to be the more likely asymmetric equilibrium.

Empirical analysis of price and pricing-cue data for consumer-electronics products across several online retailers validates our analytical findings. Our analytical and empirical assessments underscore the significance of retailers’ pricing-cue display strategies and their impact on consumers, offering both academic and managerial implications.