Ye Qiu, Ram C. Rao

Marketing Science, Vol. 39

Recommend reason

The research finds that the cash back site can allow retailers to profitably eliminate consumer search and that makes retailer sites more sticky. Thus, cash back sites can act as strategic partners of retailers. Surprisingly, even consumers that use the cash back site can be worse off in the presence of cash back sites under some conditions. In particular, if search prevention is profitable even without a cash back site, then cash back sites result in higher prices to consumers. The research also offers practical guidance through the finding that the optimal discount offer should be proportional to price rather than a flat sum.

About the author

Ye Qiu, Tongji SEM

Ram C. Rao, the University of Texas at Dallas

Keywords

E-commerce; discounts; consumer search; pricing; game theory

Brief introduction

Online cash back is a new type of reward for consumers who make a purchase via affiliated links provided by cash back websites. An interesting aspect of these sites is that a retailer may be found on all of them. For example, we see that Walmart appears on all sites, though the cash back rebate rate is no identical across sites. Moreover, these sites often list more than 2,000 retailers, including large merchants like Walmart, Amazon, eBay, and Macy’s, offering cash back. Our goal in this research is to explore the strategic role of cash back websites. In this paper, we develop a model of cash back sites, consumer search, and retailer pricing and, by analyzing it, provide answers to the following questions: How does online cash back affect price competition among retailers? Who benefits from having a third-party website that offers online cash back? Is it better to have a contract that specifies cash back as a percentage discount or flat discount? Are equilibrium transaction prices lower for users of the cash back site compared with a situation without these sites? The results provided an insight into how the cash back site helps the retailer to prevent search by consumers that visit the retailer and how it affects consumers’ welfare in equilibrium. In addition, we are also able to provide a practical guideline on how best search can be prevented for the retailer.