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

This paper examines the economic impact of the online cashback model on e-businesses’ pricing strategies. Through reimbursing a portion of the transactional amount to consumers in a form of cashback, online merchants are able to exercise third-degree price discrimination by offering two asymmetric prices via a digital dual channel. Despite some similarities, cashback differs from other promotional vehicles in many aspects. The main distinction, from an economic perspective, is that the presence of the intermediary moderates the merchant’s market power and thus poses an adverse effect on the profitability of discriminating. 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 and consumers heterogeneous in their product valuation. From a price view, the mechanism appears to offer cashback users an attractive deal since the post-cashback price they pay is perceived lower than the regular price faced by non-users. Under some conditions, however, such a seemingly “low” price is actually “high” as compared to the 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 cashback deals. This finding defies a common intuition that a discriminating firm should raise the price for some consumers but lower the price for the others. We also develop two extensions to seek explanations behind various industry practices. Our results, consistent with several real-world observations, have useful managerial implications for e-business practitioners.