Misleading sales in salience markets

ABSTRACT

This paper studies misleading sales by the low-quality firm who competes against the high-quality firm. Misleading sales intentionally make consumers (mis-)believe that the current price is a limited-time discount price. It generates a decoy for the low-quality product that inflates the reference price in consumers’ minds. We show that the low-quality firm can benefit by offering aggressive discount rates when consumers are salient thinkers who place a higher weight on a standing-out attribute.

KEYWORDS:

• Misleading sales
• salience
• salient attribute
• decoy good

JEL CLASSIFICATION:

• L13
• L15
• D21

Acknowledgment

I am grateful to Hans Haller, Dong-Hee Joe, Jiwoong Lee, Youngseok Park, and the seminar participants at the Korea Institute for International Economic Policy for their valuable comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ We can also observe field evidence consistent with this insight. The survey from Consumers’ Checkbook in 2018 reports that many retailers in the US advertised misleading sales more than 75% of the time during they visits over 2017 and 2018. See details at https://www.checkbook.org/washington-area/sale-fail/

² Admittedly, the setting with fixed qualities and prices could be very strong. However, firms start advertisement after finalizing the details of their products including qualities and prices. In our work, we show that firms may increase profits in the situation.

³ Symmetry property is assumed in Bordalo, Gennaioli, and Shleifer (2016) only for the case of two goods only. However, we apply this property to compare salience between attributes for the case of three goods.

⁴ Quality is salient for both goods if and only if $q_h/p_h>\bar{q}/\bar{p}$.

⁵ For the analysis in Herweg, Müller, and Weinschenk (2018), the brand manufacturer can set the price of its own product, the firm should take into account both the price and the demand for own product. For a detailed explanation, see Proposition 1 in Herweg, Müller, and Weinschenk (2018).

⁶ Bordalo, Gennaioli, and Shleifer (2013) assume the discount rate of misleading sales in $[p_l/p_h,1]$, which results in a different prediction from our model.

⁷ This comes from immediate calculation.

⁸ One may wonder what happens if the brand manufacturer also uses misleading sales. The brand manufacturer would like to induce quality salient for its own product. However, as long as their selling prices are fixed, the fringe firm can induce price salient for both products. This is because quality variations are fixed while (misleading) price variations can be increased across products in the choice set.

⁹ The author thanks the referee for pointing out this issue.

¹⁰ It is shown that the high-quality is not price salient when $p_h>{\bar{p}}_d(\alpha )$ in the proof of Proposition 2.