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ABSTRACTIn practice, it is not uncommon for a retailer to incentivize consumers to purchase its products by instituting a standing "rewards program" across its product line. These rewards often take the form of earned credit, calculated based on current spending, applicable toward a future purchase. In this article, we show that despite their euphemistic "rewards" label, the future‐credit promotion structure is often advantageous for the retailer, even given customers who behave rationally. By analyzing a retailer who sells distinct products to heterogeneous consumers with stochastic demands, we find that a time‐lagged discount increases the number of resulting net‐price states, thus expanding the set of rational shopping behaviors and segmentation. We also prove that even while delayed rewards generally yield higher discount levels (relative to immediate discounts), they can generate higher expected profits. We also consider the impact of imposing a spending‐level threshold for customers to earn rewards, and analyze the impact of the distinct shopping behaviors, which then emerge. By proving the efficacy of such delayed‐reward promotion structures, relative to the alternative of immediate discounts, we establish a theoretical basis for explaining why rewards programs are common in retail practice.

ABSTRACTLow‐waste packaging may imply an inconvenience to consumers and cause firms to offer a compensating price discount. For example, Starbucks' "Take the Mug Pledge" campaign provides a 10‐cent discount for customers who purchase coffee without a standard cup (i.e., customers provide their own cup). Understanding how such a discount drives demand and profit is the focus of this article. We consider a monopolist that can offer a reduced‐packaging option for its product at a variable cost savings. That option implies a transactional "inconvenience" cost for consumers. While that transactional cost is generally positive, our model also permits some consumers to associate convenience with reduced packaging. We derive the optimal price and discount that maximize profits. We show the optimal discount is bounded by the magnitude of the variable cost savings associated with the packaging reduction. We explore when the optimal discount is negative (a price premium), which requires a specific proportion of consumers to associate convenience with reduced packaging. We also derive conditions under which the firm should price to eliminate demand for the standard product, rather than segment the market, to leverage the variable cost savings of reduced packaging. When the variable cost savings are low (e.g., as is true for Starbucks), we show the profit curve for the segmenting policy is relatively flat for a discount up to several multiples of the cost differential. Finally, we demonstrate the potential for the reduced packaging option, with optimal discounting, to simultaneously increase profit and consumer surplus while reducing waste.

ABSTRACTMass customization provides a mechanism by which firms can better target a broad scope of consumer preferences and thus, in so doing, potentially increase their profits. We study product‐design and price competition between two mass‐customizing firms that serve consumers with varying tastes and finite reservation prices. Mass customization has recently received notable attention in both industry and academia, but yet there have been few studies concerning its impact in competitive settings. We contribute to this sparse literature by analyzing a two‐stage non‐cooperative game between two firms serving a Hotelling linear city. By comparing symmetric equilibrium results in settings with and without mass customization, we find that customization changes the nature of competition. More specifically, we show that with customization, a symmetric equilibrium emerges only if the firms' customization cost lies below a threshold, however, the magnitude of that cost does not influence product design decisions in equilibrium. We find that the equilibrium with customizing firms will not sustain cost levels above that threshold. Furthermore, we show that mass customizers earn higher equilibrium profits when consumers' fit sensitivity either significantly or only slightly exceeds the product valuation. On the contrary, traditional firms are better off when facing moderate fit sensitivity. We also establish that competition with mass customization may lead to lower profits and consumer surplus.