Coupons Versus Rebates

Abstract

This paper examines a key difference between two promotional vehicles, coupons and rebates. Whereas coupons offer deals up front, with the purchase of the product, rebates can be redeemed only after purchase. When consumers experience uncertain redemption costs, this difference translates to a difference in when uncertainty is resolved. With coupons the uncertainty is resolved before purchase; with rebates the uncertainty is resolved after purchase. As a result, we show that rebates are more efficient in surplus extraction but coupons offer more finetuned control over whom to serve. We identify the conditions under which each is optimal, and these conditions turn on the gap between “low” reservation price consumers' valuations and their highest redemption costs. Rebates are optimal when this gap is large; coupons tend to be optimal otherwise. Risk aversity on the part of consumers reduces the attractiveness of rebates, as does the delay between rebate redemption and rebate payment, but the latter if and only if consumers are more impatient than the seller. These observations match up well with what we know about the use of these promotional vehicles in the real world.coupons, rebates, promotion, price discrimination

Who should practice price discrimination using rebates in an asymmetric duopoly?

“…Recent works (Chen, Moorthy and Zhang, 2005;Lu and Moorthy, 2007;Soman, 1998) propose that firms could benefit from "slippage" because consumers often make purchases intending to redeem rebates but end up not redeeming them. In Chen, Moorthy and Zhang (2005) and Lu Moorthy (2007), slippage is rational in that consumers fully anticipate that they might find themselves in a future date in a state of the world where they are unable to redeem.…”

“…In Chen, Moorthy and Zhang (2005) and Lu Moorthy (2007), slippage is rational in that consumers fully anticipate that they might find themselves in a future date in a state of the world where they are unable to redeem. In Soman (1998) and Lynch and Zauberman (2006), slippage is irrational in that a fraction of consumers buy the product erroneously, due to time inconsistency, expecting to redeem the rebate.…”

Trade deals and/or on-package coupons

“…On the other hand, Equation (15) establishes that, except for µ = 0, the optimal first-period retail price, p 1 , is a strictly increasing function of the coupon offered to consumers, C. In other words, as expected, the retailer acts opportunistically and increases her first-period retail price as the coupon value given to consumers increases. The retailer also increases the first-period retail price in anticipation of the number of first-period buyers who redeem their coupons in the second period to fully take advantage of the coupon offering.…”

“…Theories developed for this type of price promotions are hardly generalizable to promotions that offer a discount after a purchase or at the time of a second purchase. As a matter of fact, Lu and Moorthy (2007) demonstrate that coupons designed to offer deals up front with the purchase and rebates that are redeemed after the purchase do not work the same way and offer different outcomes. Particularly, they find that rebates are efficient at surplus extraction, while coupons offer more fine-tuned control over who buys the products.…”

Competitive Behavior-Based Price Discrimination for Software Upgrades

“…60-74, © 2012 INFORMS in the literature: Narasimhan (1984) study coupons, Terwiesch et al (2005) analyze a "name your own price channel," Essegaier et al (2002) look at nonlinear pricing schemes in the context of capacity constraints, Chen et al (2001) evaluate the impact of imperfect individual targetability on profits under competition, Van Ackere and Reyniers (1995) evaluate the optimality of conditioning prices on purchase history. Some researchers like Lu and Moorthy (2007) have compared the attractiveness of different mechanisms for price discrimination. The ability to price discriminate between customers may impact a firm's decisions along other dimensions as well: Choudhary et al (2005) examine the impact of personalized pricing on quality choice by firms, Sundararajan (2004) finds that the firm's choice of managing piracy through digital rights management software (DRM) depends on its ability to price discriminate, and Ghose et al (2007) consider the trade-off between retailers' ability to price discriminate offline versus the savings in acquisition costs of customers in an online environment at the expense of the ability to price discriminate.…”