A Theory of Social Coupons

Abstract

'Daily deals' or online discount vouchers have emerged as an increasingly popular means of conducting promotions for many small and local businesses. Social coupons are daily deals that display voucher sales information in real-time and may require that a minimum number be sold for the deal to be valid. While conventional wisdom suggests that firms offer social coupons to motivate referrals through the use of minimum limits, many social coupons are also offered without minimum limits. We examine when and why it may be profitable for a firm to do so. We analyze a setting where voucher sales information may influence consumer beliefs about the promoted product's appeal and consumers can strategically wait to check this information before they buy. We allow for the fact that consumers may not always return when they choose to wait. Interestingly, while a social coupon's key feature is that consumers can check its progress, its profitability may be decreasing in the probability that consumers indeed return to do so. Thus, for instance, providing consumers reminders to check the deal's progress may prove counterproductive. We further examine the role of minimum limits in this setting. Our results might explain why their use may have declined.

Keywords: daily deals, social coupons, pricing, promotions, observational learning

JEL Classification: C72, L15, M31