Customer Poaching, Coupon Trading and Consumer Arbitrage∗

TL;DRAbstract

The price discrimination literature typically makes the assumption of no consumer arbitrage. This assumption is increasingly violated when firms distribute coupons to poach customers from rival firms and those coupons can be easily traded among consumers. We relax the no-arbitrage assumption and study the impacts of coupon trading on equilibrium prices, promotion intensities (frequency and depth) and profits. We find that a larger fraction of coupon traders among consumers or higher distribution costs reduce the attractiveness of couponing, and firms respond by lowering their promotion efforts. This leads to higher equilibrium prices and profits, since coupon targeting intensifies competition. These results are robust to the possibility of defensive couponing as an additional strategy to prevent ones own loyal customers from switching.

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