Rebates, matches, and consumer behavior.

• Author: Davis, Douglas D.

Evil Dog Consultant: "Don't sell your new product for $29. Offer it at $1,000,029 with a rebate of $1,000,000. People will think it's a great bargain when in fact it's just a huge inconvenience." Foolish Boss: "And all we need is one person to forget to mail in the rebate forms." Evil Dog Consultant: "We'll target the lazy rich."

Dilbert Cartoon

1. Introduction

   Standard economic theory suggests that participants should be indifferent to the format of a price reduction. Abstracting from issues of quality, convenience, and variety, a good's effective sales price should be the only relevant determinant in an optimizing decision-maker's purchase decision. However, as is clear from a stroll through any retail outlet or a glance at the advertising section of any newspaper, retailers do not format price reductions uniformly. In addition to simple price discounts, retailers often promote products with a variety of matching promotions, such as "buy one, get one free." Retailers also frequently promote price reductions as rebates, either offered at the point of purchase or on a delayed (mail-in) basis. Retailers clearly have reasons to vary price discount formats that are independent of direct consumer responses to the different formats. A "two for the price of one" matching discount, for example, may represent a form of declining block pricing, a format that may be particularly useful for exhausting bulks of perishable products. Similarly, retailers may offer rebates in an effort to price discriminate between the price sensitive customers, who send in the rebate coupon, and less price sensitive customers, who do not. (1)

   Recent experimental evidence in the context of charitable goods contributions suggests that consumers may view these different sales formats quite differently. Eckel and Grossman (2003) report much higher charity receipts under a "matching subsidy" condition, where the experimenter matched any individual contributions at a preannounced rate, than under a comparable "rebate subsidy" condition, where a portion of contributions were rebated back to participants after they made their decisions. Eckel and Grossman offer no definitive explanation for the larger receipts collected under the matching subsidy condition. However, they suggest that "cooperation" and "rewards" framing effects may explain their observed behavior. The matching subsidy, they suggest, may create a "cooperation" frame, in which the knowledge that others are also contributing stimulates contributions.

   In a related subsequent experiment Davis, Millner, and Reilly (2005) replicate the finding that matching subsidies generate substantially higher charity receipts than theoretically comparable rebate subsidies. However, in a series of treatments designed to shed light on the superior stimulative effects of matching subsidies, Davis, Millner, and Reilly find that the vast bulk of decisions are consistent with "constant contribution" behavior. Most nonoptimizing participants contribute either exactly the same gross amount under all conditions or the same gross amount on average.

   A natural and important extension of this research regards examining the impact of subsidy schemes on buyer behavior in more standard retail contexts. Discounts on consumer goods present a context that is at once less abstract than charitable contributions and one with which the relevant participant population (college undergraduates) typically has had considerably more experience. Any college student undoubtedly faces with frequency both "buy one, get one free" and "instant rebate" sales promotions. An absence of discount format effects in a more standard private goods consumption context would suggest that a failure of many individuals to appreciate the relatively subtle problem of understanding the net effects of their contributions drives the observed superior stimulative effects of matching contributions in the charitable contributions context. On the other hand, to the extent that student purchase decisions are sensitive to matching and rebate discount formats, discount formatting effects may be both more pervasive and more economically important than previously imaged.

   This paper reports an experiment conducted to evaluate the effects of different price-reduction formats on purchase decisions for a private consumer good. More specifically, we give participants the opportunity to purchase quantities of chocolate bars under different prices and under matching and rebate discount formats. Ours is certainly not the first attempt to assess "homegrown" preferences for specific consumer goods. To the contrary, efforts by economists to exploit controlled conditions to evaluate demand theory and predictions regarding the theory of revealed preference date at least to the classic study of purchase decisions by patients in a commissary at a women's psychiatric hospital by Battalio et al. (1973). Other related studies include food pellet choices by rats and pigeons (summarized in Kagel et al., 1995), preference choices for bags of chips and juice boxes by elementary school children (Harbaugh, Krause, and Berry, 2001), and consumer preferences for different types of beef packaging (Hoffman et al. 1993) and for various types of orange juices (Fevrier and Visser, 2004). (2) The present study differs from this previous research in that we focus primarily on the effects of changes in the format of identical prices, rather than the consistency of choices across different prices.

   By way of overview, we find that participants purchase considerably larger quantities of chocolate under a matching quantity condition than they purchase under either equivalent straight price reductions or under point-of-purchase "instant" rebates. Analysis of decisions suggests that, as was the case for charitable contributions, an inattention to the consequences of the different discount formats drives a substantial portion of the apparent preferences for quantity matching discounts. However, unlike charitable contributions, a distrust or dislike of rebates also explains some of participants' apparent preference for matching discounts in this private goods context. Although we cannot extend results from our laboratory study directly into retail contexts, the combined effects of inattention to the discount format, and a dislike of rebates work in the same direction, suggesting that retailers should consider carefully the use of rebates. We organize our discussion as follows. Section 2 explains the experimental design and procedures. Section 3 describes experimental results, and a short fourth section concludes.

2. Experiment Design and Procedures

   Experiment Design

   Our experiment uses a variant of the modified dictator game structure used previously by Eckel and Grossman (2003) and Davis, Millner, and Reilly (2005). (3) Here we extend the investigation of matching and rebate sales formats to private goods by giving participants the opportunity to "hold" $5 of their own money or "spend" it on chocolate bars under a series of different price and discount format conditions. To ensure that participants had disposable income at the time they made decisions, we presented the problem to interested participants after they had been paid for participation in a previous, unrelated experiment. To overcome the well-known "reluctance to trade," documented, for example, by Kahneman, Knetsch, and Thaler (1990), all prices are set very substantially below the current retail price.

   The sample Allocation Decision Sheet, presented as Figure 1, summarizes the set of possible allocations. Starting from a reference price of $0.50 per bar (BASE-50), participants made decisions regarding successively lower prices of $0.33 (BASE-33) and $0.25 (BASE-25). (4) For each price reduction we also presented participants with a pair of reductions under comparable rebate and matching subsidies. For example, given a price of $0.50, both a matching sales opportunity to get one bar free for each bar purchased (MATCH-25) or a rebate option of purchasing bars for $.50, but getting a 50% refund for each bar purchased (REBATE-25), generate an effective net price of $.25. Similarly, starting from a reference price of $.50, both a 3 for the price of 2 matching subsidy (MATCH-33) and a 33% rebate (REBATE-33) are equivalent to a net sales price of $0.33. To the extent that individuals make decisions consistent with the theory of demand, purchase quantities should at least weakly increase as the price falls ([q.sub.BASE-25] [greater than or equal to] [q.sub.BASE-33] [greater than or equal to] [q.sub.BASE-50]). Further, to the extent that individuals are insensitive to the price discount format, [q.sub.BASE-25] = [q.sub.MATCH-25] = [q.sub.REBATE-25] and [q.sub.BASE-33] = [q.sub.MATCH-33] = [q.sub.REBATE-33]. We evaluate decisions regarding rebates and matching subsidies in light of previous results. Specifically, to the extent that matching price discounts elicit larger net effects than rebates, we expect to observe [q.sub.MATCH-25] > [q.sub.REBATE-25] and [q.sub.MATCH-33] > [q.sub.REBATE-33].

   Experimental Procedures

   Data were collected from student volunteers as they completed an unrelated experiment. Just before paying participants at the conclusion of the initial experiment, a session monitor announced that a short second experiment would follow. The monitor stated...