Cross-Market Discounts

Marcel Goi\'{c} (), Kinshuk Jerath () and Kannan Srinivasan ()
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Marcel Goi\'{c}: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213; and Department of Industrial Engineering, University of Chile, Santiago, Chile
Kinshuk Jerath: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
Kannan Srinivasan: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213

Marketing Science, 2011, vol. 30, issue 1, 134-148

Abstract: Firms in several markets attract consumers by offering discounts in other unrelated markets. This promotion strategy, which we call "cross-market discounts," has been successfully adopted in the last few years by many grocery retailers in partnership with gasoline retailers across North America, Europe, and Australia. In this paper, we use an analytical model to investigate the major forces driving the profitability of this novel promotion strategy. We consider a generalized scenario in which purchases in a source market lead to price discounts redeemable in a target market. Our analysis shows that this strategy can be a revenue driver by simultaneously increasing prices as well as sales in the source market, even though we assume the demand curve to be downward sloping in price. Moreover, it distributes additional consumption (motivated by the discount) in two markets, and under diminishing marginal returns from consumption, this can simultaneously increase firm profits and consumer welfare more effectively than traditional nonlinear pricing strategies. Our study provides many other interesting insights as well, and our key results are in accordance with anecdotal evidence obtained from managers and industry publications.

Keywords: fuelperks!; retail promotions; nonlinear pricing; competition; game theory (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:30:y:2011:i:1:p:134-148

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