Conditional Promotions and Consumer Overspending
Amornpetchkul, T., Ahn, H. S., & Sahin, O. Production and Operations Management 27.8 (2018): 1455-1475
35 Pages Posted: 9 Oct 2018
Date Written: March 30, 2018
This paper investigates the effects of conditional promotions (e.g., buy 2 or more, get 30% off; spend $50 or more, get $15 off) on consumer behavior and the seller's profit. When a deal is presented with a minimum purchase quantity or a minimum spending requirement, experimental studies have shown some consumers are induced to spend more in order to obtain a discount. To study this behavior, we model a market in which consumers can be heterogeneous in two dimensions: willingness to pay for the product and deal proneness to a price discount. We examine two types of conditional promotions that are widely used in practice: i) all-unit discount, in which a price reduction applies to every unit of a purchase once the minimum requirement is met, and ii) fixed-amount discount, in which a fixed amount of discount is awarded to the total expense that meets the requirement. We show that deal-prone consumers may be induced to overspend when offered a conditional discount. However, consumer overspending benefits the seller only when the market contains a sufficiently large proportion of highly deal-prone or high-valuation consumers. Comparing the two types of discounts, we show that the all-unit discount outperforms the fixed-amount discount when the regular price for the product is high, whereas the fixed-amount discount is more profitable than the all-unit discount when some consumers would make a purchase even without a discount. Our study suggests adopting an appropriate type of conditional discount can effectively improve the seller's profit over what would be obtained through selling at the regular price or a conventional price markdown. Furthermore, we find that conditional discounts can also improve consumer welfare, resulting in win-win situations for both retailers and consumers.
Keywords: price promotions, retail pricing, conditional promotions, overspending, deal-prone consumers
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