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ABSTRACT In this paper we show how the use of a restricted number of coupons in the presence of different types of customers is an effective means of implementing a price discriminating policy. Hence, firm profits can be increased even when traditional price discrimination is forbidden.
Key words: Price discrimination; Coupons; Loyal customers; Deal prones. JEL classification: M31.
1. Introduction
The use of coupons in the USA has increased significantly over the past decade. Even the most ardent promoters of the alternative pricing strategy, EDLP (every day low price), have had to acknowledge the strategic prominence of coupons as a marketing tool. In perhaps the most well-known attack on couponing in this decade, Proctor and Gamble conducted a field experiment in Buffalo New York where couponing was replaced by the EDLP strategy. After several months P&G aborted the experiment after it became quite clear that it had lost market share to competitors who continued to issue coupons (Kanner, 1997).
The use of coupons is different from periodical price declines (seasonal sales) in the following ways.
(a) Coupons are often given throughout the year. They are often used as a market development means or as a competitive tool and thus do not necessarily depend on excessive stock or on seasonal demand.
(b) Coupons are offered with different restrictions, including the length of the promotion period, the outlet at which the coupon is applicable, the media through which the coupon is offered and the number of coupons per customer. The importance of this last item has gradually increased as firms are increasingly shifting towards customized marketing to the non-anonymous consumer using database technology. Every coupon in the monthly Safeway coupon book is restricted to a limited number of items per household (Cooperrider, 1996).This kind of restriction has become a widespread standard in the operation of convenient stores such as Pathmark, Payless, Walgreens, and Alberston (Lucky).
This kind of restriction is more effective when customers are deal prone, purchase small quantities, and have a high elasticity of demand while loyal customers are few and purchase large quantities. In this case a coupon attached to just one unit of the product attracts many new customers. The discount has little effect on the firm's revenues from loyal customers because...