Increasing Retailer Loyalty Through Use of Cash Back Rebate Sites

It is increasingly common for a website, often referred to as a cash back site, to inform and enable consumers to avail of discounts at competing retail stores. Thus, consumers who visit a cash back site are able to take advantage of discounts at retail stores that are not available unless they enter the retailer through the cash back site. In other words, cash back sites provide discounts to consumers and act as referral intermediaries for retailers. What is the strategic role of such an intermediary? To answer this, we model competition between two retailers both of whom use the case back site. Retailers compete for consumers some of whom are loyal, others switchers and some are searchers. We then analyze the equilibrium pricing strategies with and without a cash back site. When there is no cash back site equilibrium can be one of two kinds. In the first, searchers act as loyal consumers given firms' equilibrium pricing strategies. We establish this by extending Stahl (1989). In the second kind searchers act as loyal consumers when faced with low prices and switchers when faced with high prices. We establish this result by extending Narasimhan (1988). Depending on the relative pro- portion of types of consumers, their willingness to pay and the search cost of searching consumers equilibrium is of one kind or another. When there is a cash back site the equilibrium is such that searching consumers behave like loyal consumers, leading to the insight that cash back sites can make retailer sites more sticky. Moreover, the retailers' profits are rendered higher by the cash back site. This result occurs whenever some loyal consumers do not use the cash back site. We also offer practical guidance by proving that the optimal discount offer should be proportional to price rather than a flat sum. We also show that although the optimal contract has the retailer deciding the discount, under some conditions, it may be profitable for both parties to have a contract in which the cash back site decides the discount