Consumer uncertainty and price discrimination through online coupons: An empirical study of restaurants in Shanghai

We use data from restaurants in Shanghai, China to conduct a new empirical analysis of prices and coupons. Our results show a positive relationship between prices and online coupons. Moreover, the price premium from couponing is higher for restaurants about which consumer values appear to be more uncertain. When consumer uncertainty is high, restaurants that offer coupons have an average price that is about 60 percent higher than similar restaurants that do not issue coupons. When uncertainty is low, restaurants that offer coupons have an average price that is about ten percent higher. These findings are consistent with online couponing in the restaurant industry being used for price discrimination and as a promotional device in the presence of higher uncertainty in consumer valuations. 1. INTRODUCTION Why do firms issue coupons? In an influential empirical study, Nevo and Wolfram (2002) explore the relationship between grocery store shelf prices and manufacturers' coupons for ready-to-eat breakfast cereals. They find that prices become lower when coupons are issued, a result that is inconsistent with the standard monopoly price discrimination theory of couponing but can be consistent with models of price discrimination in oligopoly settings (oligopoly models are perhaps more appropriate for the breakfast cereals market). This leaves largely open the question of whether there are other market settings where the price-coupon relationship supports the standard monopoly price discrimination theory. In this paper, we use data from restaurants in Shanghai, China to conduct a new empirical analysis of prices and coupons. This market has two important characteristics that differ from breakfast cereals. First, many consumers are uncertain about their values for various restaurants, which differ both in qualities and in horizontal attributes. Even for restaurants at a specific quality level, consumer values still vary greatly due to preference diversity and may often be uncertain, especially since many consumers are short-term residents and tourists. Second, for a city with more than 48,000 restaurants, the market may be more properly viewed as one of monopolistic competition: each firm, facing its residual demand, chooses its own price optimally like a monopolist, without considering the effects of its actions on the market price. This market environment thus potentially provides a setting to test the standard monopoly price discrimination role of coupons. Interestingly, there is a website, www.dianping.com, which provides restaurant information, customer evaluations, customer reviews, and online coupons for almost 40,000 restaurants in Shanghai. Due to possible search costs, …