Economics of Public Policy – Critical Review of Research on Why Manufacturers Produce and Use Coupons
Couponing can generally be considered among the most revolutionary avenue applied by manufacturers and retailers to boost sales of their products. Additionally, for the more elastic buyers, couponing can be considered one of the most efficient cost-cutting measures when sourcing goods and services. In the 2002 article Why Do Manufacturers Issue Coupons? An Empirical Analysis of Breakfast Cereals by authors Aviv Nevo and Catherine Wolfram provides an in-depth review of couponing and the resulting relationship that the promotional avenue compels between manufacturers, sellers, and consumers. The article finds out that shelf prices are usually lower during periods when coupons are made available. Coupons are produced in large numbers, but they rarely get used by the consumers, as only 2% or $3.5 billion of the total 268.5 billion coupons produced became utilized by consumers, the rest were discarded, but manufacturers did not fail to produce them (Nevo & Wolfram, 2002). This is because coupons are versatile weapons between manufacturers and retailers.
As promotional tools, coupons are produced by the manufacturers and compelled upon retailing businesses for the aim of driving traffic to the retailers at the behest of the manufacturers; on the other, hand if a retailer refuses to take up on the offer, general coupons can be issued by the manufacturer to other retailers singling out the reluctant retailer who had refused the coupons. When consumers approach the retailer and find that the coupons are not accepted, they are compelled to take their business to stores where the coupons will become acceptable, driving down businesses within the manufacturer. The article considers coupon uptake by demography, its effects on the shelf price of the product, and the benefits and disadvantages that it results for all stakeholders (manufacturer, retailer, and buyer). Coupons as a promotional tool are revealed to offer manufacturers a concise and holistic view of the market, measuring the elasticity of the consumers and manifesting price discrimination which effectively works to define product placement across the board. Despite its limited uptake among consumers, the cost associated with running coupon promotions has remained constant if not risen. This is because of the benefit of coupons in dictating market shares that have been consistent with the benefit of the manufacturers owing to their monopoly of the market.
The main research question that Nevo and Wolfram’s article seeks to evaluate is centered on the role of couponing in price definition, market Assessment, and product (new and old) exposure to the larger consumer platforms. More importantly, why do manufacturers still produce and use coupons despite the limited lack of uptake among consumers? The results of the research reveal an inconsistent outlook on the use of coupons as, on the one hand, they result in price discrimination within the larger market, affecting retailers in specific demographics as their prices are set by manufacturers. On the other hand, Nevo and Wolfram (2002) outline that firm-wide incentives that are brought about by coupon schemes may compel many managers to apply coupons and prices cut together in a bid to attract more consumers to their stores. Holistically, coupons use among new value seekers, in the age of considered consumption, has resulted in an uptake of coupons among retailers has become a primary tool of choice (Nevo & Wolfram, 2002); this is because coupons have both encouraged repurchase and also allowed the company to advertise and promote newer products.
To understand and answer the question posed above and the intricate relationship between consumers, retailers, and buyers in regards to coupons, it is important to contextualise the stakeholder that defines the circumstances for the issuance of coupons as a promotional tool. Couponing is presented as a win-win solution for consumers as well as producers for the meager fact that couponing allows manufacturers, as well as retailers, earn consumer attention, provide cost-cutting means to consumers and allow manufacturers and consumers to advertise and sell new products, earn consumer loyalty, achieve more targeted marketing, and above all get repeat business. However, the article reveals that there is a negative relationship that exists between coupon and shelf prices, which is more often dictated by the stakeholders; this relationship dictates how product placement occurs between manufacturers and retailers and is more generally defined by the power each of these aforementioned stakeholders yield within a market. In the empirical research, Nevo and Wolfram consider coupons as a promotional tool and evaluate their use in the ready-to-eat (RTEs) breakfast cereals in America. RTEs are the most heavily couponed products in the country. They summarily evaluate that coupons and shelf prices have resulted in a defined inconsistent relationship between manufacturers and retailers and have inadvertently become a primary tool to propagate price discrimination in order to understand the consumer behavior across different demographies for the same product.
In an oligopoly setting, where the market is characterized by a small number of firms that have realized their interdependency in their output and pricing policies, these few firms can take advantage of their perceived power, rising demand for their product to create monopolistic tendencies that are aimed to stifle their threat. In this case, RTEs numbered 25 compared to countrywide retailers have more power to dictate the terms of their sales and control product pricing across the regions they supply. Coupons become the means through which they control product sale, pricing, market familiarization, and introduce new products to market. Nevo and Wolfram (2002) outline since the RTEs are small enough to give each individual cereal product some market power, they create static monopoly price discrimination that is inconsistent under a broad range of assumptions for the benefit of the manufacturers, as they become able to sell their products, and for the benefit of the retailer, as they compel price-conscious consumers to visit their stores.
The dynamic theoretical concepts of oligopoly, monopoly, and price discrimination are used to better evaluate the relationship and between manufacturers and retailers. Nevo and Wolfram establish that coupons are produced and used by the manufacturers to seek to establish greater market share for profit maximization. There is an underlying static monopolistic pricing strategy that defines the cereal market during the time of their research as cereal companies, with considerable power over their retailing counterparts, used couponing to boost sales. Categorically coupons are used to set prices of RTEs for greater consumer uptake, but within the manufacturers themselves, coupons are used to undercut their cereal manufacturing competitors for greater market share. A larger market share comes to define greater monopolistic power over retailing companies. Nevo & Wolfram (2002) find that shelf prices in retail centers are usually low when coupons are offered by the manufactures. This is usually at the end of the year when managers have an incentive to also reduce prices so as to meet market share targets; in this regard, they are able to maximize sales and profits.
The researcher predicts a correlation between coupons and prices, as mentioned earlier, is based on the fact that coupons induce incentives among retail centers that managers are keen on exploiting. Nevo and Wolfram (2002) outline that coupon has a positive effect on sales, as it drives greater traffic to retail stores; in the case of RTEs across 65 cities, sales in the period when coupons were offered rose significantly, but the underlying downside was the reduced price of similar products, even those that were not coupon induced by competition among RTEs cereal manufacturers. The reduction in price as a phenomenon can be seen to have been induced by the retail managers themselves and the manufacturers competing for greater market share. The effect that couponing has on pricing resulted in a patterned microeconomic pricing strategy that manifests in discriminatory and nondiscriminatory pricing depending on the market share of a manufacturer, retailer, and the end of the fiscal year of the manufacturer and retailer. As such, coupons became a critical tool for understanding consumers (Nevo & Wolfram, 2002). The price discrimination concept ensures that identical goods or similar goods and services are sold at different prices by the same provider in different regions of the market, owing to demographical changes.
In a discriminating monopoly, such as the RTEs cereal industry, the asymmetrical oligopoly setting that has manifested; few RTEs manufacturers exist, large customer base, and considerable sizable retailers, sees the RTEs manifest the power of using coupons to set prices of their products to drive consumer uptake. As price discrimination is only achievable through the firm’s monopoly status and its exploitation of the monopoly to control pricing and production without competition, pure price discrimination is unable to be attained. The significantly reduced number of RTEs cereal manufacturers and their asymmetrical relationship has resulted in increased Interbrand competition. Nevo and Wolfram (2002) outline that “Interbrand competition can cause all prices to be lower than the price.” When cereal companies come to achieve a larger market share, discriminatory pricing starts to manifest, as they impose reduced prices to increase uptake.
There are other models under the theoretical concept of price discrimination that similarly explain the effects of couponing. Nevo and Wolfram (2002) express that price discrimination has a strategic interaction effect, revealing that in oligopolistic industries, where symmetry in market share can be attained the price discrimination does not always lead to higher profits. The price might be reduced, and the market might be in the circulation of the product already making coupons redundant or effectively making the product widely available with a limited number of buyers. It may result in lower profits, lower sales, and lower prices for buyers. In their argument for price reduction, Nevo & Wolfram (2002) outline that “Prices will only fall for all consumers if the coupon users and nonusers have different brand preferences.” In cases of symmetrical oligopoly relationships, constant issuance of coupons may be redundant in the long run. Nove & Wolfram (2002) also reveal that a dynamic demand effect exists that evaluates the propensity of purchase between high and low valuation buyers.
Coupons should be strategically provided, in a timely fashion, or by evaluating different demographics of people, and not in a generalized sense. High valuation buyers may not be affected by the prices; as such have little regard for coupons, low valuation buyers will be willing to postpone their purchase to a more favorable price (Nove & Wolfram, 2002). Manufacturers and retailers may choose to use coupons to clear out low valuation buyers. Additionally, retailers, as the primary givers of coupons rather than the manufacturers who produce them, may give out coupons or increase shelf prices in order. In cases where retailers have a larger market share, they may withhold coupons, which will result in higher wholesale prices. Generally, couponing is issued to control the prices of the products and define the market share of a product. It is also used to segment customers into low and high valued customers; this too allows better pricing strategy by either the manufacture or the retailer. In the case of the RTEs cereal industry, coupons are used to address market share and retain the oligopolistic nature of the industry, undercutting retailers; they are also used strategically to boost the individual cereal company’s marketing position. They help reduce prices and set discriminatory prices in regions where profit is likely.
Couponing in a perfectly competitive market is effective in the reduction of prices, identification of consumer trends, and proper pricing. As it is, pricing is a core element in the free market economy. Pricing controls, to a larger extent, the public welfare and, in a manner, defines consumer trends. There is an oligopolistic market that exists between manufacturers and retailers, all for their own benefit, as they seek to maximize profits. As it is manufacturers and retailers are engaging in potentially harmful behavior of price discrimination, fixing, collusion, and resale price maintenance through coupon repurchase for lagged sales, there is a need to create an oversight network that evaluates the issuance of coupons in a manner that promotes equitable and healthy pricing practices for better economic and consumer welfare.
References
Nevo, A. and C. Wolfram (2002), “Why do manufacturers use coupons? An empirical analysis of breakfast cereals.” RAND Journal of Economics 33(2), pp. 319-339.
