In Marginal Revolution: Buy one get one free, Alex Tabarrok explains why buy-one-get-one-free offers (BOGOs) are more profitable than half-off sales:
To see why, assume that you value your first pizza of the night at $15.01 and the second at $5.01 and let’s say it costs the store $2 to make each pizza. If the pizza store has a buy-one-get-one-free offer at $20 then you will buy two pizzas and the store will have profits of $16 ($20-$2-$2). But if the store sells pizzas for half price, $10 each, you will buy just one pizza and the store will have profits of just $8 ($10-$2). The BOGO doubles the store’s profits!Carefully designed BOGOs increase profits because they let the firm price more flexibly, what economists unfortunately call “price discrimination.” At $20, the BOGO is equivalent to charging $15 for the first pizza and $5 for the second.