Coupon Trading and its Impacts on Consumer Purchase and Firm Profits

• We model coupon trading and its impacts on consumer purchase and firm profits.
• Retailer and manufacturers can benefit from coupon trading, but not simultaneously.
• Coupon trading enables firms to charge higher prices and obtain higher profits.
• Firms can be more profitable with coupon trading than improved coupon targeting.
• Coupon trading combined with incentive mechanisms may lead to a Pareto improvement.

When a retailer distributes manufacturer coupons to consumers without perfectly identifying their product valuations, consumers may have incentives to trade coupons. We develop a model to capture the coupon trading phenomenon and compare three scenarios: (I) no coupon, (II) coupon without trading, and (III) coupon with trading. We find that coupon trading can increase the profits of either the retailer or the manufacturers, but not at the same time. The retailer benefits from coupon trading when the coupon market is competitive and consumer hassle cost is low, while the manufacturers benefit from coupon trading when the coupon market is uncompetitive and consumer hassle cost is high. In addition, coupon trading does not always increase total demand. Firms benefit from coupon trading by charging higher prices, which leads to a decreased total demand. As a result, consumers end up with a higher average cost under coupon trading. We also compare coupon trading with improved coupon targeting, and find that coupon trading may allow firms to gain higher profits than improved coupon targeting. Further, we extend the main model to a competitive setting where the products are substitutable, and find that the main results still hold. Finally, we employ numerical analysis to identify the optimal coupon face values in different scenarios, and the results suggest that coupon trading combined with incentive mechanisms may lead to Pareto improvement for the channel as a whole.

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