The Optimal Coupon Strategy in the Presence of Internet

This paper characterizes the optimal coupon strategy for a monopolistic manufacturer in the presence of Internet. The literature on coupon strategies has examined the price discrimination function of regular coupons (those issued off the Internet) under the assumption of fu ll consumer awareness for the product; see Gerstner and Hess (1991, 1995). This paper allows the manufacturer to issue both regular and e-coupons in a marketing environment where some potential buyers are unaware of the product. We show that e-coupons perform a fundamentally different function than regular coupons: By issuing some properly designed e-coupons to a small number of consumers on the net, the manufacturer may benefit greatly from free advertising which raises the consumer awareness for the product. This happens because the e-coupons may be forwarded to the associates of the early receivers under the latter’s discretion. We distinguish two levels of redemption costs, the costs of acquiring a coupon, and the costs of carrying the coupon till redemp tion. We show that (1) if consumers have similar carrying costs, then an e-coupon and a regular coupon should be issued, which perform respectively the advertising and promotion functions; (2) If consumers have similar acquisition costs but very different carrying costs, and if there are many low-valuation consumers, then the manufacturer should issue just one e-coupon which performs the dual functions of advertising and promotion; (3) If consumers’ acquisition and carrying costs are both similar, and if there are few low-valuation consumers, then again an e-coupon and a regular coupon should be issued, which perform respectively the advertising and promotion functions, but in this case the face value of the e-coupon must be much higher than that in case (1). Despite the merits of e-coupons, we find that the issuance of e-coupons may reduce the benefits of regular coupons and/or aggravate the downstream channel members’ incentive problems. Our results are consistent with recent empirical facts