Eric Johnson

Divide and Prosper: Why Firms Divide Prices Instead of Charging a Single Price

Coauthor(s): V. Morwitz, Eric Greenleaf.

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Abstract:
Many firms divide a product's price into two mandatory parts, such as the base price of a mail-order shirt and the surcharge for shipping and handling, rather than charging a combined, all-inclusive price. The authors call this strategy partitioned pricing. Although firms presumably use partitioned pricing to increase demand and profits, there is little clear empirical support that these prices increase demand or any theoretical explanation for why this should occur. The authors test hypotheses of how consumers process partitioned prices and how partitioned pricing affects consumers' processing and recall of total costs and their purchase intentions and certain types of demand. The results suggest that partitioned prices decrease consumers' recalled total costs and increase their demand. The manner in which the surcharge is presented and consumers' affect for the brand name also influence how they react to partitioned prices.

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