Coupons vs. Rebates

A seller can use promotional vehicles like coupons and rebates to price discriminate among customers. Main characteristics of coupons vs. rebates:

Coupons:

1. Offer deals upfront, with the purchase of the product

2. Uncertainty is resolved before purchase

3. Customers pays a lower price (mostly the promotional price)

4. Costs include finding them, clipping them, and remembering to product it on the next shopping trip (before expires)

5. All consumers with a given reservation prices are not ex ante identical to the seller (high vs. low redemption costs)

6. Optimal when the least attractive segment is not very attractive — when the different between its product valuation and redemption cost is small (as with low ticket goods)

Rebates:

1. Redeemed only after purchase

2. Uncertainty is resolved after purchase

3. More efficient in surplus extraction for sellers

4. Consumers may still pay the regular price (due to slippage on redemption)

5. Costs of finding them, remembering to redem them before they expire and fulfilling the redemption requirements and costs of waiting for the rebate check to arrive

6. Optimal when it is optimal to serve even the least attractive segment (as with high-ticket goods).  It is too costly to redeem for frequently purchased low-ticket items, which typically offer small discounts.

7. Customer risk aversion and the delay between redemption and payment may hurt rebates.

Effectiveness of price discrimant for the following:

(a) Newspaper coupons for potato chips

–It’s an effective way to price discriminate between customers who are price sensitive and customers who ignore coupons.  Studies show that only 20-30% of all consumers regularly bother to clip, save, and use coupons when they go shopping.  These customers tend to be more sensitive to price.  They generally have more price elasticity demands and lower reservation prices.

(b) Manufacturer rebates for DVD players

–Consumers redeemed rebates only after purchase.  It’s an efficient way for manufacturer to extract surplus due to consumer slippage on redemption.  Therefore, consumers may still pay the regular price if they forget to redeem the rebates before expiration.  Rebates are administered mostly on high-ticket goods since it will be too costly for consumers to redeem for low-ticket items with small discounts.  DVD players are mid-price items.  Unless the discounts are large enough, the possibility of redemption slippage is high.  Therefore, there is the potential for manufacturer to extract surplus from offering rebates.

(c) Mail coupons for take-out pizza

–Price discrimination ability is lower for mail coupons since the consumers’ redemption costs are relatively lower.  It does not cost that much for a conusmer to order take-out pizza using the mail coupon from home.