Saturday, June 14, 2003

The Economics of Coupons

I once asked a law professor friend of mine (he had also done a PhD in economics at MIT) why sellers of food products use coupons? Why not just put their items on sale and avoid the cost of reimbursing the grocers for the hassle of dealing with coupons, not to mention the hassle of dealing with coupons themselves?

His answer: Price discrimination. Food manufacturers want to be able to sell to different types of consumers at different prices. I.e., rather than sell merely 100 units of an item at $2.50 apiece to the customers willing to pay $2.50, they'd prefer to sell the 100 at that price and then somehow sell an extra 50 units at $2.00 apiece to the customers who don't want to pay $2.50.

Using coupons is a good way to do that, because the only customers who use coupons are those who find it worth their time to rummage through the Sunday paper and cut out coupons and keep track of them. But if the sellers put the items on sale, it wouldn't be price discrimination, because all customers would get the same sale price.

So that makes some sense. But I forgot to ask a further question that is a bit more puzzling. Why do some food manufacturers pay to have a little red plastic machine set up right beside their product for the purpose of distributing coupons there in the store? This can't possibly work as well to create price discrimination, because the seller has drastically lowered the cost to the customer of using the coupon, such that all customers would be more likely to use it. And if that's the case, why not just put the item on sale and avoid the hassle of dealing with coupons?


Blogger Jeff said...

It could work as price discrimination. Believe it or not, many people won't go to the trouble of getting the coupon out of the little machine and keep it with them as they go through the store. Same goes for the store's reward programs. Even though it's relatively simple (although annoying) to do, most people will not go to the trouble of filling out a form if they don't yet have a loyalty card. It's price discrimination at all sorts of levels.

11:34 AM  
Blogger Unknown said...

Those red things are just for added product advertisement. (I see it on a product I wouldn't normally buy and decide to purchase it because it is 5 dollars off today.)

8:03 AM  
Blogger Bilal M. Khan said...

I think you'l find the answer to this in behavioral economics. People are not as rational as mainstream economics presumes them to be.
I think that once people have a coupon, not using it gives them a feeling that they are wasting something of value. You could say that this feeling has a disutility associated with it.
I'd recommend Dan Ariely's 'Predictably Irrational'. Or Thaler and Sunstein's 'Nudge'. It will give you insights into many similar kinds of behavior.

8:53 AM  

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