Do Firms Use Coupons and In-store Discounts to Strategically Market Experience Goods Over the Consumption Life-Cycle? The Case of Cigarettes

Cigarettes are experience goods - most of their utility value only gets revealed when one consumes them. We hypothesize a three phase consumer life cycle for experience goods. Consumers initially do not know their utility from the good or their preferences for particular characteristics, and may initially choose the most familiar brand. In the second phase, they are informed about the good and may experiment with different brands. In the third phase, they may become loyal to one brand or exit the market. Firms could target price discounts for each phase, either to encourage experimentation (pay-to-switch), to retain customers (pay-to-stay), or to price-discriminate. We use market-level data on price, sales, in-store discounts, and coupon offers of 15 brands from 1995 to 2007 and individual-level data on brand choices from 1995 to 2004 to explore whether firms discount cigarettes in ways consistent with a life-cycle consumption model. We find that the three highest-selling brands primarily discount as price discrimination and pay-to-stay strategies, while smaller, specialty brands discount to encourage smokers to switch brands.