On the optimality of coupon books

Abstract

Our research was motivated by the challenge that a discount airline can set prices below traditional levels. One possible response for the traditional airline is to offer a book of coupons at a fixed price, in an attempt to retain or even increase market share. Offering coupon books is a way to induce changes in customer buying practices. Here we assume that each customer acts strategically in deciding whether or not to switch airlines and whether to buy the coupon book or the regular tickets. Other than price, the number of coupons in the book provides a way to segment the market. Airlines usually have data on circumstances where no coupon books were offered, but they generally do not have the luxury of experimenting by offering coupon books and gauging the response. The focus for this work is therefore: using only the data that is currently available (from the non-coupon case), are there key indicators that can help an airline decide whether or not to offer coupon books? We demonstrate that the crucial factor is the company’s current market share, and we show how to establish a threshold market share above which coupon books should not be offered. This becomes useful when advising a manager on a course of action, as the decision can be based on knowledge of current market share and beliefs about future market share. We show that there can be a broad region in which a manager can tolerate the give and take involved in behavioral and group decision making.