Customer Poaching and Coupon Trading

Abstract:     
The price discrimination literature typically assumes no consumer arbitrage. This assumption is increasingly violated in the digital economy. Besides the fact that consumers trade goods online, firms offer coupons to attract customers and coupons are auctioned off with increased frequency. We study the impact of coupon trading on equilibrium prices, promotion intensity (frequency and depth) and profits. Our results show that: (i) Firms have no incentive to distribute defensive coupons. (ii) When both firms offer transferrable coupons, an increase in the fraction of coupon traders and an increase in coupon distribution costs both reduce the attractiveness of offensive couponing. Firms respond by promoting less aggressively, which leads to higher equilibrium prices and profits. (iii) When only one firm's coupons are transferrable, an increase in the fraction of coupon traders benefits the firm with non-transferrable coupons at a cost to the other firm. (iv) Firms prefer to mimic each other's decision on coupon type. The choice of transferable coupons, however, leads to higher profits.

Keywords: Customer Poaching, Coupon Trading, Consumer Arbitrage, Defensive coupon

JEL Classifications: D43, L13, M31

Working Paper Series