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Cross-Market Discounts

Author

Listed:
  • Marcel Goi'{c}

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213; and Department of Industrial Engineering, University of Chile, Santiago, Chile)

  • Kinshuk Jerath

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Kannan Srinivasan

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

Firms in several markets attract consumers by offering discounts in other unrelated markets. This promotion strategy, which we call "cross-market discounts," has been successfully adopted in the last few years by many grocery retailers in partnership with gasoline retailers across North America, Europe, and Australia. In this paper, we use an analytical model to investigate the major forces driving the profitability of this novel promotion strategy. We consider a generalized scenario in which purchases in a source market lead to price discounts redeemable in a target market. Our analysis shows that this strategy can be a revenue driver by simultaneously increasing prices as well as sales in the source market, even though we assume the demand curve to be downward sloping in price. Moreover, it distributes additional consumption (motivated by the discount) in two markets, and under diminishing marginal returns from consumption, this can simultaneously increase firm profits and consumer welfare more effectively than traditional nonlinear pricing strategies. Our study provides many other interesting insights as well, and our key results are in accordance with anecdotal evidence obtained from managers and industry publications.

Suggested Citation

  • Marcel Goi'{c} & Kinshuk Jerath & Kannan Srinivasan, 2011. "Cross-Market Discounts," Marketing Science, INFORMS, vol. 30(1), pages 134-148, 01-02.
    • Handle: RePEc:inm:ormksc:v:30:y:2011:i:1:p:134-148
    DOI: 10.1287/mksc.1100.0603
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    Cited by:

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    4. Stourm, Valeria & Bradlow, Eric T., 2023. "Cross-reward effects in a coalition loyalty program: The impact of a point currency devaluation," International Journal of Research in Marketing, Elsevier, vol. 40(2), pages 276-293.

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