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Research Note—Price Discrimination After the Purchase: Rebates as State-Dependent Discounts

Stern School of Business, New York University, New York, New York 10012
Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
ychen{at}stern.nyu.edu
moorthy{at}rotman.utoronto.ca
zjzhang{at}wharton.upenn.edu

Promotional tools such as rebates and coupons are usually seen as different ways of price discriminating among consumers. We focus on a different property of rebates: their ability to price discriminate within a consumer among her postpurchase states. Unlike price discrimination between consumers, this property is unique to rebates because, by design, they are redeemed after the purchase. (Coupons, by contrast, are redeemed with the purchase.) The consumer redeems the rebate only in postpurchase states in which her marginal utility of income is high. This selective redemption behavior provides an opportunity for the seller to "utility arbitrage," directing discounts to when they matter most, resulting in an increase in the consumer’s up-front willingness to pay. In turn, this enables an increase in the regular price. Of course, rebates can still price discriminate among consumers. Indeed, their ability to deliver state-dependent discounts may enhance their overall price discrimination ability, as we show in an example comparing them to coupons.

Key Words: rebates; state-dependent discounts; utility arbitrage
History: Received: January 31, 2003;

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