Analysis of Retailer Pricing in the Presence of Coupons: An Examination of Breakfast Cereal Industry

A coupon is a ticket or document that can be exchanged for a direct financial discount when purchasing a specific product, or a total amount of goods in a certain store. Coupons are usually issued by manufacturers of packaged goods or by retailers, to be used as a part of sales promotions. As coupons are extensively adopted to enhance consumer demand and to compete for market share, they draw considerable in the food marketing and industrial organization literature. The objective of this study is to examine how coupons impact retailers’ pricing decisions. Specifically, this study explores how retailer pricing and couponing change based on competitor’s coupon issuance; and whether different types of coupons (manufacturer verses retailer) have different impacts on retailer’s pricing. Breakfast cereals are heavily purchased. The substantial diversity of cereal products makes it easy to compare prices across stores, and lead to intense price competitions. Regional markets may adopt various mechanisms to attract consumers and maximize own profits; instead, they may also observe others’ behaviors and make decisions of achieving a joint profit. Hence, firms’ profit maximization procedures are analyzed under two scenarios: non-cooperative, and cooperative. The data employed in this study are taken from the 2006-2008 ACNielsen Homescan data. We focus on the market of New York because coupons are mostly redeemed in this market. Economic theory indicates that prices and coupon levels influence each other. To account for the bidirectional causality between coupon values and prices, the determinants of prices and coupon values are simultaneously identified by a two-equation, fixed-effects, and panel-data system. The problem of endogeneity arises due to data availability and exclusion variables are included. Estimation results indicate that a retailer will decrease the cereal price by 6.685 cents if its competitor increases the retailer coupon by 1 cent. This suggests that because both cereal prices and retailer coupon values are close across stores, consumers may be better off comparing prices between stores if there are retailer coupons available in the market. The positive relation between own and cross retailer coupon values suggests that retailers compete over cereals, and they may also cooperatively decide prices and coupon values.