Economics of Coupons

Nowadays program of coupons is very popular. Absolutely different companies use coupons, pursuing different purposes. It is assumed that main possible purposes of using coupons: the first, to discriminate and thus to get more money, and the second, to promote company`s product on the market. In this essay we would like to consider economic nature of coupons, look at the main researches which are already conducted and try to implement one of such research into the practice, by carrying out a survey among students.  After we will briefly tell about different  coupon strategies that companies usually follow.

Different targeted price discounts are a form of price discrimination when the business offers different prices to different segments of clients. In fact, the firm offers a lower price to certain clients not because these clients are cheaper for company in terms of providing services for them but because such customers are typically more careful with their spending than other customers and the company tries to attract them by suggesting discount coupons. For example, movie theaters often offer cheaper prices to students and senior citizens, not because it's cheaper to have them sit in the theater, but because they are typically more sensitive to price and thus they are ready to pay less for watching a movie than middle-aged adults with jobs.

The use of coupons also helps a business to segregate the "cheapskates" among their customers from the people who are too busy to worry about saving a few dollars.

Customers have different preferences and will not respond in identical ways to various prices. The business owner initially does not know which customers are sensitive to price and which are not. By taking advantage of correlations with other observable traits (such as a customer's age or willingness to clip coupons), the business owner can tailor his pricing and seize more win-win exchanges^[1]. So to attract those with high price elasticity companies offer coupons. “Win-win” nature of that action lies in the increasing number of companies’ clients: having offered coupons the company has clients who previously buy products or services at regular (uniform, market, shelf) price plus clients who have never bought at regular price due to their individual price sensitivity but who eventually buy products or services at discount price – at the very first look it seems obvious that company has higher profit and increasing clients base (actually we will show later in this work that it is not always so). In other words, the company expects that its current clients have low price elasticity and then will continue buy products or services at the regular price while new clients with high price elasticity will be attracted by launching coupons.

There are so-called hassle costs that for example include loses in time or other non-financial costs. If a person considers savings of buying a coupon to be higher than his hassle costs, then this person would use this coupon. As we already mentioned, the theory tells that users of coupon are more price elastic then those who do not use coupons: in other words, the more price elastic individual demand is, the lower is the estimation of hassle cost for the individual. So we have two target groups of customers: one group consists of people who determine their hassle costs as high and thus are price-inelastic; and another group consists of people who believes their hassle costs to be low and thus who are price-sensitive (price-elastic). In this sense, we can speak about price discrimination of the 3 degree, because the same product is offered to the different groups of the customers. But the review of the literature on this topic elicit that some researchers determine couponing as the price discrimination of the second type while others – as the price discrimination of the third type. We agree with the latters.

In scientific literature a lot has been written in terms of describing coupons. Interesting researches were conducted about the characteristics that influence the consumer to redeem coupons. Especially early works show that level of education, income, invest in some capital assets are good predictors for redemption coupon. Other authors add that there is trend in redemption of coupons: with increasing of income, redemption of coupons increases too until some point, then starts to decrease.^[2] Some researches indicate that consumers choose some groups of product for buying coupons and are prone to be consistent with made choice.^[3]

All coupon strategies can be divided into imperfect targeting and the perfect one. The first type of targeting means that consumer decides by himself, what type of consumers he/she belongs to, according his/her hassle costs.  The most of the articles illustrate different aspects of imperfect targeting. Still, some researchers devoted their articles to the one-to-one coupon targeting, when coupon is designed for a particular customer. In this field researches claim that it`s cost-consuming strategy and not always beneficial for the competitive company.^[4]

There are two views on whether companies implementing coupons should increase or decrease the regular (non-coupon) price. First, coupons attract those with high price elasticity. Thus, those who continue to buy the product at its regular price are price-inelastic and under such assumption manufacture may raise its regular price on the product. So, after issuing coupons the company raises the prices. Another view is opposite: companies issued the coupons on their products or services should lower the regular price in order to prevent all customers form using only coupons. When coupons are available for all consumers it may be reasonable to offer coupons and at the same time to lower the store price.^[5] Again, we have two types of customers – those who don’t want to pay at the full price any way, and those who are ready to pay. If the marginal customers have moderate or low hassle costs, these clients may buy coupon and not the item in the shop at the full price, so the company loses part of its money (some part of the “ready-to-pay-at-initial-high-price” clients can be attracted by coupons). In order to keep them the company should lower price.

In our opinion, both explanations of store price changing (whether it decreases or increases) are correct. Mainly it depends on the distribution of the company’s clients: if most clients are price elastic “cheapskates”, then company should lower the price when issues the coupons in order to prevent all ‘cheapskates’ from using coupons. On the other hand, if most clients are price inelastic then there is possibility to attract new customers by issuing the coupons and the gain additional profit from current clients by increasing price. Nevertheless, the review of relevant literature showed that generally companies reduce store prices when issue coupons.