Dynamic Pricing with Point Redemption

Hakjin Chung (), Hyun-Soo Ahn () and So Yeon Chun ()
Additional contact information
Hakjin Chung: College of Business, Korea Advanced Institute of Science and Technology (KAIST), Seoul 02455, Republic of Korea
Hyun-Soo Ahn: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
So Yeon Chun: INSEAD, Fontainbleau 77305, France

Manufacturing & Service Operations Management, 2022, vol. 24, issue 4, 2134-2149

Abstract: Problem definition : Reward points function as a new currency that consumers can spend on products and services. We study how point redemption affects the seller’s day-to-day pricing and inventory decisions. Academic/practical relevance : Despite widespread use of point redemption, little has been done on its implication on the seller’s operational decisions. This paper extends the revenue management literature to incorporate the impact of point redemption and provides managerial insights on how the seller can factor point redemption into decisions about price and inventory. Methodology : We develop a choice model in which a consumer chooses to pay with cash or points based on the attributes of reservation price, point balance, and the perceived value of a point. We incorporate this choice model into a dynamic model where a seller adjusts the price along with redemption availability and the required point amount. Results : We show that the effect of point redemption on the seller’s price is nontrivial, as the optimal price tilts upward or downward to the reimbursement rate (the compensatory revenue for a reward sale) depending on the inventory level, time, and the reimbursement rate. Furthermore, such price adjustments can attenuate the optimal markup/markdown level, reducing the price fluctuation derived by a dynamic pricing policy in the absence of reward sales. We find that operationalizing reward sales with some discretionary policies (e.g., control over the reward availability or point requirement) can considerably increase the seller’s revenue. Managerial implications : Our results guide how sellers manage prices and inventory dynamically when consumers can redeem points for purchases. Specifically, we show that a seller can benefit from allowing reward sales even when the reimbursement rate is substantially lower than the cash price. Although the seller benefits from having full control over the required point balance, the greatest benefit can be realized via the control of reward availability.

Keywords: dynamic pricing; reward point redemption; consumer choice (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/msom.2021.1067 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:24:y:2022:i:4:p:2134-2149

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().