22 Pages Posted: 27 Dec 2010 Last revised: 9 Feb 2016
Date Written: January 11, 2016
The price discrimination literature typically makes the assumption of no consumer arbitrage. This assumption is increasingly violated in the digital economy, where coupons are traded with increased frequency online. In this paper, we analyze the welfare impacts of coupon trading using a modified Hotelling model where firms send coupons to poach each other's loyal customers. The possibility of coupon trading renders this important instrument for price discrimination less effective. Moreover, coupon distribution has unintended consequences when coupon traders sell coupons back to a firm's loyal customers. Consequently, coupon trading may reduce firms' incentive to distribute coupons, leading to higher prices and profits. We find that, an increase in coupon distribution cost lowers promotion frequency but raises promotion depth, and an increase in the fraction of coupon traders lowers both promotion frequency and promotion depth.
Keywords: Customer Poaching, Coupon Trading, Consumer Arbitrage.
JEL Classification: D43, L13, M31
Suggested Citation: Suggested Citation
Kosmopoulou, Georgia and Liu, Qihong and Shuai, Jie, Customer Poaching and Coupon Trading (January 11, 2016). Journal of Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1487710 or http://dx.doi.org/10.2139/ssrn.1487710