Effects of gift cards on optimal order and discount of seasonal products

•We examine the effect of selling gift cards on holiday products’ stocking level.•Gift cards’ profitability depends on treatment of unredeemed balances by the state.•Gift cards’ profitability increases with demand variability.•Gift cards’ profitability depends on type of products consumers purchase with them.

Gift cards are replacing cash and holiday products as gifts for many consumers. We analyze the effect of gift card sales on a retailer’s optimal stocking level of holiday products and his expected profit within the newsvendor model framework. We derive the sufficient condition for the optimal stocking level of holiday products. We find that increased gift card sales decrease the retailer’s optimal stocking level. The effect of gift card sales on the expected profits depends on treatment of unredeemed gift card balances by the state and the type of non-holiday products gift card redeemers buy with gift cards. When these balances remain with the retailer, even small non-redemptions of gift cards will cause gift card sales to increase most retailers’ expected profit. When balances are treated as abandoned property which must be turned to the state after a specified period of time, gift cards sales may increase or decrease the retailer’s expected profit. If gift card redeemers buy products with gift cards they would not have bought from the retailer in cash, then the optimal expected profit is likely to increase. Gift card profitability increases with demand variability and the post-holiday markdown required to sell holiday products to bargain hunters. The performance of gift cards also depends on consumers’ reservation prices for non-holiday products. If unredeemed gift card balances are collected by the state, then profitability of gift cards increases with increased consumer reservation prices for non-holiday products.