"One question facing managers who decide to promote a product periodically is whether to offer frequent but shallow or deep but infrequent discounts. Previous research does not offer clear insights on the superiority of one tactic over the other," write Ashok K. Lalwani and Kent B. Monroe, both of the University of Illinois.
In a forthcoming study in the Journal of Consumer Research, the researchers found that frequently fluctuating prices caused consumers to perceive a product's average price as lower than when the price of a product was reduced by a larger amount but less often. Thus, the line of sale-priced cars may be a better scheme than a deep price cut here and there.
"It has been shown that frequent but modest discounts lead to perceptions of greater value and higher rates of purchase than do less frequent but deeper discounts," explain the authors. "[These] results indicate that the salience of frequency or magnitude of discounts influence price perceptions. In the case of magnitude of discounts, the salience is due to the absolute size, and not the percentage of discounts."
Lalwani, Ashok K. and Kent B. Monroe. "A Re-examination of Frequency-Depth Effects in Consumer Price Judgments." Journal of Consumer Research, Dec 2005.