Discount Pricing

Topics Addressed

1. Comparing Two Sample Averages
2. Business

Discount stores often introduce new merchandise at a special low price to induce people to try it. But in the mid-1960s a prominent psychologist predicted that in the long run this practice would actually reduce sales.

With the cooperation of a discount chain (I think it was K-Mart), an experiment was performed in 1968 to test this theory. A representative sample of 120 stores was chosen, and the stores were arranged into 60 pairs, matched according to characteristics like sales volume and location. These stores did not advertise, and displayed their merchandise in similar ways. A new kind of cookie was introduced in all 120 stores. Within each pair of stores, one was chosen at random to introduce the cookies at the special low price of 49 cents a box, with the price increasing to 69 cents after two weeks; the other store in the pair introduced the cookies at the regular price of 69 cents a box. Total sales (in cases) of the cookies were computed for each store for six weeks from the time they were introduced; the results are given below.

      pair       discount    standard          difference 
     number       sales       sales      (discount - standard) 
    =============================================================
       1            851         916                -65 
       2            903        1004               -101 
       .             .           .                  . 
       .             .           .                  . 
      60            787         699                +88  
    =============================================================
            mean    854         923                -69 
             SD      58         157                150 

Does this evidence support or refute the psychologist's theory?

What was the point of pairing the stores in the way they did?

Explain briefly.

George Michailides
gmichail@stat.ucla.edu