Retail Pricing and Clearance Sales

47 Pages Posted: 28 Jun 2004 Last revised: 16 Dec 2022

See all articles by Edward P. Lazear

Edward P. Lazear

Stanford Graduate School of Business; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: September 1984

Abstract

Sellers of new products are faced with having to guess demand conditions to set price appropriately. But sellers are able to adjust price over time and to learn from past mistakes. Additionally, it is not necessary that all goods be sold with certainty. It is sometimes better to set a high price and to risk no sale. This process is modeled to explain retail pricing behavior and the time distribution of transactions. Prices start high and fall as afunction of time on the shelf. The initial price and rate of decline can be predicted and depends on thinness of the market, the proportion of customers who are "window shoppers," and other observable characteristics. In a simplecase, when prices are set optimally, the probability of selling the product is constant over time. Among the more interesting predictions is that women's clothes may sell for a higher average price than men's clothes, given similar cost, even in a competitive market. Another is that the initial price level and the rate of price decline are positively related to the probability of selling the good. Other observable relationships are discussed.

Suggested Citation

Lazear, Edward P., Retail Pricing and Clearance Sales (September 1984). NBER Working Paper No. w1446, Available at SSRN: https://ssrn.com/abstract=328687

Edward P. Lazear (Contact Author)

Stanford Graduate School of Business ( email )

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IZA Institute of Labor Economics

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