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Customer Poaching and Coupon Trading

22 Pages Posted: 27 Dec 2010 Last revised: 9 Feb 2016

Georgia Kosmopoulou

University of Oklahoma - Department of Economics

Qihong Liu

University of Oklahoma - Department of Economics

Jie Shuai

Zhongnan University of Economics and Law

Date Written: January 11, 2016

Abstract

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

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

Georgia Kosmopoulou

University of Oklahoma - Department of Economics ( email )

729 Elm Avenue
203 Hester hall
Norman, OK 73019-2103
United States
405-325-3083 (Phone)
405-325-5842 (Fax)

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

Jie Shuai

Zhongnan University of Economics and Law ( email )

182 Nanhu Ave.
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

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