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

See all articles by Yi-Chun (Chad) Ho

Yi-Chun (Chad) Ho

George Washington University - School of Business

Yi-Jen (Ian) Ho

Pennsylvania State University - Smeal College of Business

Yong Tan

University of Washington - Michael G. Foster School of Business

Date Written: April 28, 2017

Abstract

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

Suggested Citation

Ho, Yi-Chun (Chad) and Ho, Yi-Jen (Ian) and Tan, Yong, Online Cash-Back Shopping: Implications for Consumers and e-Businesses (April 28, 2017). Information Systems Research, 28(2), pp. 250-264, 2017. Available at SSRN: https://ssrn.com/abstract=2516431 or http://dx.doi.org/10.2139/ssrn.2516431

Yi-Chun (Chad) Ho (Contact Author)

George Washington University - School of Business ( email )

Washington, DC 20052
United States

HOME PAGE: http://business.gwu.edu/profiles/yi-chun-chad-ho/

Yi-Jen (Ian) Ho

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

Yong Tan

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
520
Abstract Views
2,527
rank
54,123
PlumX Metrics