IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v26y2007i1p67-82.html
   My bibliography  Save this article

Coupons Versus Rebates

Author

Listed:
  • Qiang Lu

    (Faculty of Economics and Business, The University of Sydney, Sydney, NSW2006, Australia)

  • Sridhar Moorthy

    (Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, Ontario, M5S3E6 Canada)

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.

Suggested Citation

  • Qiang Lu & Sridhar Moorthy, 2007. "Coupons Versus Rebates," Marketing Science, INFORMS, vol. 26(1), pages 67-82, 01-02.
  • Handle: RePEc:inm:ormksc:v:26:y:2007:i:1:p:67-82
    DOI: 10.1287/mksc.1050.0129
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.1050.0129
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mksc.1050.0129?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2001. "Reward Programs and Tacit Collusion," Marketing Science, INFORMS, vol. 20(2), pages 99-120, June.
    2. Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 272-292, March.
    3. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
    4. José Luis Moraga‐González & Emmanuel Petrakis, 1999. "Coupon Advertising Under Imperfect Price Information," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(4), pages 523-544, December.
    5. Z. John Zhang & Aradhna Krishna & Sanjay K. Dhar, 2000. "The Optimal Choice of Promotional Vehicles: Front-Loaded or Rear-Loaded Incentives?," Management Science, INFORMS, vol. 46(3), pages 348-362, March.
    6. Yuxin Chen & Sridhar Moorthy & Z. John Zhang, 2005. "Research Note---Price Discrimination After the Purchase: Rebates as State-Dependent Discounts," Management Science, INFORMS, vol. 51(7), pages 1131-1140, July.
    7. Greg Shaffer & Z. John Zhang, 1995. "Competitive Coupon Targeting," Marketing Science, INFORMS, vol. 14(4), pages 395-416.
    8. Jagmohan S. Raju & Sanjay K. Dhar & Donald G. Morrison, 1994. "The Effect of Package Coupons on Brand Choice," Marketing Science, INFORMS, vol. 13(2), pages 145-164.
    9. Ganesh Iyer, 1998. "Coordinating Channels Under Price and Nonprice Competition," Marketing Science, INFORMS, vol. 17(4), pages 338-355.
    10. Rey, Patrick & Tirole, Jean, 1986. "The Logic of Vertical Restraints," American Economic Review, American Economic Association, vol. 76(5), pages 921-939, December.
    11. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
    12. Elizabeth J. Warner & Robert B. Barsky, 1995. "The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 321-352.
    13. Aradhna Krishna & Z. John Zhang, 1999. "Short- or Long-Duration Coupons: The Effect of the Expiration Date on the Profitability of Coupon Promotions," Management Science, INFORMS, vol. 45(8), pages 1041-1056, August.
    14. Chakravarthi Narasimhan, 1984. "A Price Discrimination Theory of Coupons," Marketing Science, INFORMS, vol. 3(2), pages 128-147.
    15. Banks, Jeffrey & Moorthy, Sridhar, 1999. "A model of price promotions with consumer search," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 371-398, April.
    16. Gerstner, Eitan & Hess, James D, 1991. "A Theory of Channel Price Promotions," American Economic Review, American Economic Association, vol. 81(4), pages 872-886, September.
    17. Shaffer, G. & Zhang, Z.J., 1994. "Competitive Coupon Targeting," Papers 94-02, Michigan - Center for Research on Economic & Social Theory.
    18. Scott A. Neslin & Robert W. Shoemaker, 1983. "A Model for Evaluating the Profitability of Coupon Promotions," Marketing Science, INFORMS, vol. 2(4), pages 361-388.
    19. Sanjay K. Dhar & Jagmohan S. Raju, 1998. "The Effects of Cross-Ruff Coupons on Sales and Profits," Management Science, INFORMS, vol. 44(11-Part-1), pages 1501-1516, November.
    20. Sanjay K. Dhar & Donald G. Morrison & Jagmohan S. Raju, 1996. "The Effect of Package Coupons on Brand Choice: An Epilogue on Profits," Marketing Science, INFORMS, vol. 15(2), pages 192-203.
    21. Jinhong Xie & Steven M. Shugan, 2001. "Electronic Tickets, Smart Cards, and Online Prepayments: When and How to Advance Sell," Marketing Science, INFORMS, vol. 20(3), pages 219-243, June.
    22. Eyal Biyalogorsky & Eitan Gerstner, 2004. "Contingent Pricing to Reduce Price Risks," Marketing Science, INFORMS, vol. 23(1), pages 146-155, March.
    23. Jeuland, Abel P & Narasimhan, Chakravarthi, 1985. "Dealing-Temporary Price Cuts-by Seller as a Buyer Discrimination Mechanism," The Journal of Business, University of Chicago Press, vol. 58(3), pages 295-308, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yi-Chun (Chad) Ho & Yi-Jen (Ian) Ho & Yong Tan, 2017. "Online Cash-back Shopping: Implications for Consumers and e-Businesses," Information Systems Research, INFORMS, vol. 28(2), pages 250-264, June.
    2. Su, Meng & Zheng, Xiaona & Sun, Luping, 2014. "Coupon Trading and its Impacts on Consumer Purchase and Firm Profits," Journal of Retailing, Elsevier, vol. 90(1), pages 40-61.
    3. Kutsal Dogan & Ernan Haruvy & Ram Rao, 2010. "Who should practice price discrimination using rebates in an asymmetric duopoly?," Quantitative Marketing and Economics (QME), Springer, vol. 8(1), pages 61-90, March.
    4. Yuxin Chen & Sridhar Moorthy & Z. John Zhang, 2005. "Research Note---Price Discrimination After the Purchase: Rebates as State-Dependent Discounts," Management Science, INFORMS, vol. 51(7), pages 1131-1140, July.
    5. Zhang, Jianqiang, 2016. "The benefits of consumer rebates: A strategy for gray market deterrence," European Journal of Operational Research, Elsevier, vol. 251(2), pages 509-521.
    6. Geoffrey Fisher & Matthew McGranaghan & Jura Liaukonyte & Kenneth C. Wilbur, 2023. "Price promotions, beneficiary framing, and mental accounting," Quantitative Marketing and Economics (QME), Springer, vol. 21(2), pages 147-181, June.
    7. Navdeep S. Sahni & Dan Zou & Pradeep K. Chintagunta, 2017. "Do Targeted Discount Offers Serve as Advertising? Evidence from 70 Field Experiments," Management Science, INFORMS, vol. 63(8), pages 2688-2705, August.
    8. Fei Gao & Ozgun Caliskan Demirag & Frank Y. Chen, 2012. "Early Sales of Seasonal Products with Weather‐Conditional Rebates," Production and Operations Management, Production and Operations Management Society, vol. 21(4), pages 778-794, July.
    9. Banks, Jeffrey & Moorthy, Sridhar, 1999. "A model of price promotions with consumer search," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 371-398, April.
    10. Lifeng Mu & Xin Tang & Vijayan Sugumaran & Wei Xu & Xiangyang Sun, 2023. "Optimal rebate strategy for an online retailer with a cashback platform: commission-driven or marketing-based?," Electronic Commerce Research, Springer, vol. 23(1), pages 475-510, March.
    11. Khouja, Moutaz & Pan, Jingming & Ratchford, Brian T. & Zhou, Jing, 2011. "Analysis of free gift card program effectiveness," Journal of Retailing, Elsevier, vol. 87(4), pages 444-461.
    12. Scott M. Gilpatric, 2009. "Slippage in Rebate Programs and Present-Biased Preferences," Marketing Science, INFORMS, vol. 28(2), pages 229-238, 03-04.
    13. Raju, Jagmohan S., 1995. "Theoretical models of sales promotions: Contributions, limitations, and a future research agenda," European Journal of Operational Research, Elsevier, vol. 85(1), pages 1-17, August.
    14. Ye Qiu & Ram C. Rao, 2020. "Increasing Retailer Loyalty Through the Use of Cash Back Rebate Sites," Marketing Science, INFORMS, vol. 39(4), pages 743-762, July.
    15. Timothy J. Richards, 2006. "Sales by multi-product retailers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 261-277.
    16. Alessandro Acquisti, 2014. "Inducing Customers to Try New Goods," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(2), pages 131-146, March.
    17. Martín-Herrán, Guiomar & Sigué, Simon-Pierre, 2015. "Trade deals and/or on-package coupons," European Journal of Operational Research, Elsevier, vol. 241(2), pages 541-554.
    18. Yuefeng Li & Jingming Pan & Jing Zhou, 2022. "Optimal pricing with free gift cards in a two-product supply chain," Flexible Services and Manufacturing Journal, Springer, vol. 34(1), pages 125-155, March.
    19. Gregory J. King & Xiuli Chao & Izak Duenyas, 2019. "Who Benefits When Prescription Drug Manufacturers Offer Copay Coupons?," Management Science, INFORMS, vol. 65(8), pages 3758-3775, August.
    20. Imke Reimers & Claire (Chunying) Xie, 2019. "Do Coupons Expand or Cannibalize Revenue? Evidence from an e-Market," Management Science, INFORMS, vol. 65(1), pages 286-300, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:26:y:2007:i:1:p:67-82. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.