Consumers on a Leash: Advertised Sales and Intertemporal Price Discrimination

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 from higher costs of advertising. Based on this framework, the impact of commitment on prices, profits, and welfare are 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.