Two common examples of indirect price discrimination are coupons and quantity discounts. Coupons offer discounts for products and are especially common in grocery stores, where they are usually provided in a free newspaper section at the front of the store. Coupons discriminate based on the cost of time. Coupons are a very effective way of discriminating prices.
Customers who respond very well to price changes, that is, customers with very elastic demand, are likely to take the time to find coupons that effectively reduce the price of the good. On the other hand, customers who are less responsive to price changes due to their less elastic demand are not as likely to take the time to find coupons. Price discrimination: coupons and discounts. doc.
This article studies the promotion of sales through coupons in a duopolistic market. Sending coupons allows sellers to separate market segments with varying degrees of brand loyalty from the consumer. This type of price discrimination is profitable for the individual seller when the cost of coupons is sufficiently low. However, in balance, coupons increase competition and reduce profits.
An increase in the cost of coupons decreases consumer surplus, while the impact on profits and social surplus is ambiguous. The purpose of this article is to analyze the consumer's decision when choosing to use discount coupons distributed by consumer product manufacturers. Based on a theoretical pricing model, coupon users are shown to be more price elastic than non-coupon users and that the opportunity cost of time and other household resource variables are determining factors in consumer decisions. Where P is the price of the good, C is the value of the coupon, Ça is the price elasticity of demand for customers of group A who have less elastic demand, çB is the price elasticity of demand for customers of group B who have more elastic demand, and MC is the marginal cost.
Therefore, customers who do not use a coupon pay the price P, while customers who use the coupon pay the price P — C, where C represents the value of the coupon. In the equation, P is the price of a restaurant meal in dollars, C is the coupon value in dollars, çV is the price elasticity of demand for vacation travelers, çL is the price elasticity of demand for local residents, and MC is the marginal cost in dollars. Arguing that the decision to use coupons is based on the trade-off between the costs of using coupons and the savings obtained, it is demonstrated that coupons can serve as a price discrimination device to provide a lower price to a particular segment of consumers. One method of providing coupons to local residents that would generally exclude vacation travelers is to use advertising emails delivered to local addresses or post coupons in local newspapers.