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http://ssrn.com/abstract=1518182
 
 

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Cross-Market Discounts


Marcel Goic


Carnegie Mellon University - David A. Tepper School of Business

Kinshuk Jerath


Columbia University - Columbia Business School

Kannan Srinivasan


Carnegie Mellon University - David A. Tepper School of Business

December 4, 2009


Abstract:     
Firms in several markets try to 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 sales are negatively elastic in price, ceteris paribus. 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.

Number of Pages in PDF File: 49

Keywords: fuelperks, PowerPump, retail promotions, nonlinear pricing, competition, game theory

JEL Classification: M31

working papers series


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Date posted: December 5, 2009  

Suggested Citation

Goic, Marcel and Jerath, Kinshuk and Srinivasan, Kannan, Cross-Market Discounts (December 4, 2009). Available at SSRN: http://ssrn.com/abstract=1518182 or http://dx.doi.org/10.2139/ssrn.1518182

Contact Information

Marcel Goic
Carnegie Mellon University - David A. Tepper School of Business ( email )
5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268 5162 (Phone)
Kinshuk Jerath (Contact Author)
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States

Kannan Srinivasan
Carnegie Mellon University - David A. Tepper School of Business ( email )
5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
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