Dynamic Pricing with Point Redemption

63 Pages Posted: 30 Jul 2019

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

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Date Written: July 26, 2019

Abstract

Many sellers allow consumers to pay with reward points instead of cash or credit card. While the revenue implications of cash and credit card purchases are transparent, the implications of reward sales are not trivial, especially when a firm that issues points is not a seller. In this case, a seller receives a monetary compensation or reimbursement from the point issuer when a consumer purchases the good by redeeming points. In this paper, we examine how reward sales influence a seller’s pricing and inventory decisions. In particular, we consider a consumer who can choose to pay with cash or points based on her attributes – reservation price, point balance, and the perceived value of a point. Then, we incorporate this consumer choice model into a dynamic pricing model where a seller earns revenues from both cash and reward sales. In contrast to an intuition that adding 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 offer a discount depending on the inventory level, time, and the reimbursement rate. Furthermore, such price adjustments (premium or discount) can attenuate the optimal mark-up or mark-down level, and reduce the price fluctuation caused by inventory level and remaining time. We also investigate several settings where the seller has a different level of operational control over reward sales and show that the seller blocks the reward sales only when the reimbursement rate is very low. That is, allowing reward sales is still better even when the revenue from the reward sales is smaller than the cash sales. In addition, we find that a seller with an ability to control reward availability (i.e., allow a reward sale or not) can achieve a revenue similar to the revenue of a seller with ability to change point requirements and price at the same time.

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 (July 26, 2019). KAIST College of Business Working Paper Series No. 2019-013; Georgetown McDonough School of Business Research Paper No. 3426903. Available at SSRN: https://ssrn.com/abstract=3426903 or http://dx.doi.org/10.2139/ssrn.3426903

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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