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Conditional Promotions and Consumer Overspending

Author

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  • Thunyarat (Bam) Amornpetchkul
  • Hyun‐Soo Ahn
  • Özge Şahin

Abstract

This study investigates the effects of conditional promotions (e.g., buy 2 or more, get 30% off; spend $50 or more, get $15 off) on consumer behavior and the seller's profit. When a deal is presented with a minimum purchase quantity or a minimum spending requirement, experimental studies have shown some consumers are induced to spend more in order to obtain a discount. To study this behavior, we model a market in which consumers can be heterogeneous in two dimensions: willingness to pay for the product and deal proneness to a price discount. We examine two types of conditional promotions that are widely used in practice: (i) all‐unit discount, in which a price reduction applies to every unit of a purchase once the minimum requirement is met, and (ii) fixed‐amount discount, in which a fixed amount of discount is awarded to the total expense that meets the requirement. We show that deal‐prone consumers may be induced to overspend when offered a conditional discount. However, consumer overspending benefits the seller only when the market contains a sufficiently large proportion of highly deal‐prone or high‐valuation consumers. Comparing the two types of discounts, we show that the all‐unit discount outperforms the fixed‐amount discount when the regular price for the product is high, whereas the fixed‐amount discount is more profitable than the all‐unit discount when some consumers would make a purchase even without a discount. Our study suggests adopting an appropriate type of conditional discount can effectively improve the seller's profit over what would be obtained through selling at the regular price or a conventional price markdown. Furthermore, we find that conditional discounts can also improve consumer welfare, resulting in win‐win situations for both retailers and consumers.

Suggested Citation

  • Thunyarat (Bam) Amornpetchkul & Hyun‐Soo Ahn & Özge Şahin, 2018. "Conditional Promotions and Consumer Overspending," Production and Operations Management, Production and Operations Management Society, vol. 27(8), pages 1455-1475, August.
  • Handle: RePEc:bla:popmgt:v:27:y:2018:i:8:p:1455-1475
    DOI: 10.1111/poms.12877
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    Cited by:

    1. Niels Agatz & Yingjie Fan & Daan Stam, 2021. "The Impact of Green Labels on Time Slot Choice and Operational Sustainability," Production and Operations Management, Production and Operations Management Society, vol. 30(7), pages 2285-2303, July.
    2. Rajesh Bagchi & Sung H. Ham & Chuan He, 2020. "Strategic Implications of Confirmation Bias‐Inducing Advertising," Production and Operations Management, Production and Operations Management Society, vol. 29(6), pages 1573-1596, June.
    3. Agatz, N.A.H. & Fan, Y. & Stam, D.A., 2020. "Going green: the effect of green labels on delivery time slot choices," ERIM Report Series Research in Management ERS-2020-009-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    4. Nigam, Achint & Dewani, Prem & Behl, Abhishek & Pereira, Vijay, 2022. "Consumer’s response to conditional promotions in retailing: An empirical inquiry," Journal of Business Research, Elsevier, vol. 144(C), pages 751-763.

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