Online Cash-Back Shopping: Implications for Consumers and e-Businesses
Information Systems Research, 28(2), pp. 250-264, 2017
34 Pages Posted: 31 Oct 2014 Last revised: 30 Mar 2018
Date Written: April 28, 2017
Through reimbursing a portion of the transactional amount to some consumers in a form of cashback, merchants are able to exercise third-degree price discrimination by offering two asymmetric prices via an online dual channel. To better understand such a novel pricing mechanism, we develop a game theoretical model and start our analyses with a market consisting of one merchant, one affiliate site and consumers heterogeneous in their product valuation. From a price point of view, cashback shopping appears to provide site users with a saving opportunity since the effective post-cashback price they pay is perceived lower than the regular price targeted at non-users. However, we find that under some conditions this seemingly lower price could be actually higher, as compared to the optimal uniform price when the merchant does not price-discriminate. An important implication is that all consumers may end up suffering from higher prices in the presence of the cashback mechanism. This surprising result, referred to as the cashback paradox, defies a common intuition that a price-discriminating firm must raise the price for one market segment but decrease for the other. Two extensions were developed to seek explanations behind various industry practices. We find that that it is in a merchant’s best interest to affiliate with multiple sites and the resulting competition improves overall market efficiency. Moreover, merchants who are disadvantageous in brand valuation should target price-sensitive consumers by strategically offering cashback deals. Our results, consistent with several real-world observations, have useful implications for marketers.
Keywords: cash back; price discrimination; electronic commerce; digital marketing; online pricing; game theory; double marginalization; dual channel
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