Coupons are a popular form of price discrimination, allowing 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. 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. An increase in the cost of coupons decreases consumer surplus, while the impact on profits and social surplus is ambiguous. Thus, it can be concluded that coupons are an effective way for sellers to discriminate prices based on customer's cost of time and other household resource variables.
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