Journal of Economics

, Volume 118, Issue 3, pp 219–238 | Cite as

Customer poaching and coupon trading

Article
  • 230 Downloads

Abstract

The price discrimination literature typically makes the assumption of no consumer arbitrage. This assumption is increasingly violated in the digital economy, where coupons are traded with increased frequency online. In this paper, we analyze the welfare impacts of coupon trading using a modified Hotelling model where firms send coupons to poach each other’s loyal customers. The possibility of coupon trading renders this important instrument for price discrimination less effective. Moreover, coupon distribution has unintended consequences when coupon traders sell coupons back to a firm’s loyal customers. Consequently, coupon trading may reduce firms’ incentive to distribute coupons, leading to higher prices and profits. We find that, an increase in coupon distribution cost lowers promotion frequency but raises promotion depth, and an increase in the fraction of coupon traders lowers both promotion frequency and promotion depth.

Keywords

Customer poaching Coupon trading Consumer arbitrage 

JEL Classification

D43 L13 M31 

References

  1. Aguirre I, Espinosa M (2004) Product differentiation with consumer arbitrage. Int J Ind Organ 22:219–239CrossRefGoogle Scholar
  2. Alger I (1999) Consumer strategies limiting the monopolist’s power: multiple and joint purchases. Rand J Econ 30:736–758CrossRefGoogle Scholar
  3. Anderson S, Ginsburgh V (1999) International pricing with costly consumer arbitrage. Rev Int Econ 7:126–139CrossRefGoogle Scholar
  4. Armstrong M (2006) Recent developments in the economics of price discrimination. In: Advances in economics and econometrics: theory and applications: Ninth World Congress, eds. Blundell, Newey and Persson, Cambridge University PressGoogle Scholar
  5. Bester H, Petrakis E (1996) Coupons and oligopolistic price discrimination. Int J Ind Organ 14:227–242CrossRefGoogle Scholar
  6. Brander J, Krugman P (1983) “A reciprocal dumping” model of international trade. J Int Econ 15:313–321Google Scholar
  7. Calzolari G, Pavan A (2006) Monopoly with resale. RAND J Econ 37:362–375CrossRefGoogle Scholar
  8. Chen Y (1997) Paying customers to switch. J Econ Manage Strategy 6(4):877–897CrossRefGoogle Scholar
  9. Chen Y (2008) Dynamic price discrimination with asymmetric firms. J Ind Econ 56:729–751CrossRefGoogle Scholar
  10. Corts K (1998) Third-degree price discrimination in oligopoly. RAND J Econ 29:306–323CrossRefGoogle Scholar
  11. Deltas G, Salvo A, Vasconcelos H (2012) Consumer-surplus-enhancing collusion and trade. RAND J Econ 43(2):315–328CrossRefGoogle Scholar
  12. Fong Y, Liu Q (2011) Loyalty rewards facilitate tacit collusion. J Econ Manage Strategy 20:739–775CrossRefGoogle Scholar
  13. Fudenberg D, Tirole J (2000) Customer poaching and brand switching. RAND J Econ 31:634–657CrossRefGoogle Scholar
  14. Fudenberg D, Villas-Boas M (2006) Behavior-based price discrimination and customer recognition. In: Hendershott TJ (ed) Handbook on economics and information systems, pp 377–436Google Scholar
  15. Gans J, King S (2007) Perfect price discrimination with costless arbitrage. Int J Ind Organ 25:431–440CrossRefGoogle Scholar
  16. Haile P (2003) Auctions with private uncertainty and resale. J Econ Theor 108:72–100CrossRefGoogle Scholar
  17. Liu Q, Serfes K (2004) Quality of information and oligopolistic price discrimination. J Econ Manage Strategy 13:671–702CrossRefGoogle Scholar
  18. Liu Q, Serfes K (2006) Customer information sharing among rival firms. Eur Econ Rev 50:1571–1600CrossRefGoogle Scholar
  19. Narasimhan C (1984) A price discrimination theory of coupons. Market Sci 3:128–147CrossRefGoogle Scholar
  20. Shaffer G, Zhang ZJ (1995) Competitive coupon targeting. Market Sci 14:395–415CrossRefGoogle Scholar
  21. Shaffer G, Zhang ZJ (2002) Competitive one-to-one promotions. Manage Sci 48:1143–1160CrossRefGoogle Scholar
  22. Zacharias E, Williams SR (2001) EX post efficiency in the buyer’s bid double auction when demand can be arbitrarily larger than supply. J Econ Theor 97:175–190CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Wien 2016

Authors and Affiliations

  1. 1.National Science FoundationArlingtonUSA
  2. 2.Department of EconomicsUniversity of OklahomaNormanUSA
  3. 3.Wenlan School of BusinessZhongnan University of Economics and LawWuhanPeople’s Republic of China

Personalised recommendations