Online Cash-back Shopping: Implications for Consumers and e-Businesses

Abstract

Through reimbursing a portion of the transactional amount to some consumers in a form of cash back, merchants are able to exercise third-degree price discrimination by offering two asymmetric prices via an online dual channel. To better understand such a novel pricing mechanism, we develop a game theoretical model and start our analyses with a market consisting of one merchant, one affiliate site, and consumers heterogeneous in their product valuation. From a price point of view, cash-back shopping appears to provide site users with a saving opportunity since the effective post-cash-back price they pay is perceived to be lower than the regular price targeted at nonusers. However, we find that under some conditions, this seemingly lower price could be actually higher, compared with the optimal uniform price when the merchant does not price discriminate. An important implication is that all consumers may end up suffering from higher prices in the presence of the cash-back mechanism. This surprising result, referred to as the cash-back paradox, defies a common intuition that a price-discriminating firm must raise the price for one segment of consumers but decrease it for the other. We also develop two extensions to seek explanations behind various industry practices. We find that it is in a merchant’s best interest to affiliate with multiple sites, and the resulting competition improves overall market efficiency. Moreover, merchants who are disadvantageous in brand valuation should target price-sensitive consumers by strategically offering cash-back deals. Our results, consistent with several real-world observations, have useful implications for marketers. The online appendix is available at https://doi.org/10.1287/isre.2017.0693

Mapping the Ethicality of Algorithmic Pricing: A Review of Dynamic and Personalized Pricing

“…Prices can be framed, however, in ways to mitigate such potentially negative perceptions, for instance, by providing external reference prices that make the stated price appear more attractive, or by offering an additional cash coupon or a gift (Lee and Monroe 2008;Weisstein et al 2013). In online environments, highly popular sites such as Ebates or MrRebates build on cash back models, offering two asymmetric prices thereby making use of promotions and price discrimination at the same time (Ho et al 2017). Ho et al (2017, p. 2), warn in this regard from the "cash-back paradox," meaning that "[u]nder some conditions, all consumers will end up suffering from higher prices compared with the uniform price they would have faced if the merchant did not price discriminate.…”

Cashback Is Cash Forward: Delaying a Discount to Entice Future Spending

“…From a theoretical standpoint, our main goal is to bridge the gap between the growing use of cashback shopping and the understanding of the phenomenon. Our research adds empirical evidence to studies that are predominantly analytical in nature (Chen et al 2008; Ho, Ho, and Tan 2017; Zhou et al 2017). To our knowledge, the only other empirical study on the subject focuses on the relationship between the size and composition of a user’s network and the extent and pattern of navigation at the cashback company’s website (Ballestar, Grau-Carles, and Sainz 2016).…”

The impact of monetary rewards for online reviews

“…A monetary reward can be regarded as a means of implementing price discrimination between buyers who contribute “influential reviews” and those who do not. The fact that all buyers may be worse off when there exists a small monetary reward accords with the “cash-back paradox,” in which all consumers suffer from higher prices in the presence of a cash-back mechanism (Ho et al , 2017). Like our result, this paradox defies the common intuition that a price-discriminating firm must raise the price for one segment of consumers but decrease it for the other.…”