Conditional Promotions and Consumer Overspending

Thunyarat (Bam) Amornpetchkul, Hyun‐Soo Ahn and Özge Şahin

Production and Operations Management, 2018, vol. 27, issue 8, 1455-1475

Abstract: This study investigates the effects of conditional promotions (e.g., buy 2 or more, get 30% off; spend $50 or more, get $15 off) on consumer behavior and the seller's profit. When a deal is presented with a minimum purchase quantity or a minimum spending requirement, experimental studies have shown some consumers are induced to spend more in order to obtain a discount. To study this behavior, we model a market in which consumers can be heterogeneous in two dimensions: willingness to pay for the product and deal proneness to a price discount. We examine two types of conditional promotions that are widely used in practice: (i) all‐unit discount, in which a price reduction applies to every unit of a purchase once the minimum requirement is met, and (ii) fixed‐amount discount, in which a fixed amount of discount is awarded to the total expense that meets the requirement. We show that deal‐prone consumers may be induced to overspend when offered a conditional discount. However, consumer overspending benefits the seller only when the market contains a sufficiently large proportion of highly deal‐prone or high‐valuation consumers. Comparing the two types of discounts, we show that the all‐unit discount outperforms the fixed‐amount discount when the regular price for the product is high, whereas the fixed‐amount discount is more profitable than the all‐unit discount when some consumers would make a purchase even without a discount. Our study suggests adopting an appropriate type of conditional discount can effectively improve the seller's profit over what would be obtained through selling at the regular price or a conventional price markdown. Furthermore, we find that conditional discounts can also improve consumer welfare, resulting in win‐win situations for both retailers and consumers.

Date: 2018
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