Dynamic Pricing with Point Redemption
Manufacturing & Service Operations Management, Forthcoming
KAIST College of Business Working Paper Series No. 2019-013
61 Pages Posted: 30 Jul 2019 Last revised: 21 Oct 2021
Date Written: July 26, 2019
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
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