Dynamic Pricing with Point Redemption

46 Pages Posted: 20 Mar 2018

See all articles by Hakjin Chung

Hakjin Chung

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business

So Yeon Chun

Georgetown University - Robert Emmett McDonough School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2018

Abstract

Many sellers allow consumers to pay with reward points instead of cash or credit card. While the revenue implications of cash purchases are transparent, the implication of reward sales is not trivial, when a firm that issues points is not a seller. In this case, a seller receives a compensation from the point issuer when a consumer purchases the good with points. We examine how reward sales influence a seller's pricing and inventory decisions. We consider a consumer who can choose to pay with cash or points based on reservation price, point balance, and the perceived value of a point. Then, we incorporate this into a pricing model where a seller earns revenues from both cash and reward sales. In contrast to an intuition that reward sales will increase sales and revenue, we show that the effect of reward sales on the seller's price is non-trivial as the seller could either add a premium or discount depending on the inventory level, time, and the reimbursement rate. Furthermore, such price adjustments can attenuate the optimal mark-up or mark-down level, and reduce the price fluctuation caused by inventory level and remaining time. We investigate settings where the seller has different operational controls over reward sales and find that allowing reward sales is still better even when the revenue from the reward sales is smaller than the cash sales. We also find that a seller with an ability to control availability (i.e., allow a reward sale or not) can achieve a revenue similar to the revenue of a seller with an ability to change point requirements and price.

Keywords: Dynamic Pricing, Reward Point Redemption, Consumer Choice

Suggested Citation

Chung, Hakjin and Ahn, Hyun-Soo and Chun, So Yeon, Dynamic Pricing with Point Redemption (March 1, 2018). Georgetown McDonough School of Business Research Paper No. 3143850; Ross School of Business Paper No. 1377. Available at SSRN: https://ssrn.com/abstract=3143850 or http://dx.doi.org/10.2139/ssrn.3143850

Hakjin Chung (Contact Author)

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States

So Yeon Chun

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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