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Price Discrimination as an Adverse Signal: Why an Offer to Spread Payments May Hurt Demand, Marketing Science


We offer an explanation for why firms may forgo an opportunity to price discriminate. By revealing that a product is being sold to a broad range of segments the retailer implicitly claims that the product is suitable for each segment. However, this may yield an adverse quality signal. The prediction is illustrated in the paper using a formal model and tested empirically by investigating how the introduction of installment billing affects demand in a mail-order catalog that targets customers who purchase premium quality products. Installment billing plans offer retailers the opportunity to discriminate between customers who face a high cost of capital and other customers who are less credit constrained and less price sensitive. We predict that the introduction of installment billing may prompt an unfavorable quality inference and reduce demand amongst the catalog




Eric T. Anderson, Duncan Simester

Date Published



Anderson, Eric T., and Duncan Simester. 2001. Price Discrimination as an Adverse Signal: Why an Offer to Spread Payments May Hurt Demand. Marketing Science. 20(3): 315-327.


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