A model of price promotions with consumer search

Abstract

This paper presents a price discrimination model of price promotions. The distinguishing feature of our model is the explicit distinction between regular and promotional prices: Regular prices are chosen first, then promotional prices. Further, while regular prices are always available to everyone, promotional prices are only available when offered, and only to those who search for them. We show that even a monopolist will offer random promotions under these circumstances. Furthermore, as search costs increase, the frequency and depth of promotions increase. With competition for the promotion-oriented consumers, the seller becomes more aggressive in his promotional policies, even more so as search costs increase. The high reservation price consumers, however, end up worse off with competition.