Price discounts or coupon promotions: does it matter?

This article shows that in a model of exogenously given sales expansion target with a dominant manufacturer, the relative profitability of coupon and price-reduction schemes depends on the values of coupon redemption rates and the equivalence ratio of price reduction to coupon face value. It is also shown that retailer’s margin has an uncertain impact on the compensation constraint on the manufacturer’s choice between the two schemes. However, higher retailer’s margin increases the likelihood that the chosen sales expansion scheme (SES) is the one that generates higher consumer welfare. A sales response model is used to estimate the equivalence ratio and critical coupon redemption rate below which the manufacturer will prefer a coupon promotion. A sensitivity analysis of the manufacturer’s decision reveals that changes in the magnitude of the retailer’s margin have little impact on the manufacturer’s choice between alternative SESs. D 2002 Elsevier Inc. All rights reserved.