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Decision Support Systems 44 (2008) 606 – 620

www.elsevier.com/locate/dss

Customer-centric marketing with Internet coupons

Hsing Kenneth Cheng a,b,⁎, Kutsal Dogan c
a
Department of Information Systems and Operations Management, Warrington College of Business Administration,
University of Florida, Gainesville, FL 32611, USA
b
Visiting Professor, Department of Industrial and Information Management, National Cheng Kung University, Taiwan, ROC
c
Information Systems and Operations Management, School of Management, University of Texas at Dallas, Richardson, TX 75080, USA
Received 20 June 2006; received in revised form 2 August 2007; accepted 3 September 2007
Available online 12 September 2007

Abstract

We develop an analytical framework to examine customer-centric marketing with Internet coupons. We show that mass
distribution of Internet coupons without a customer-centric information system to identify customers' profile will have adverse
consequences that defeat the price discrimination effect of couponing. We analyze alternative strategies including distributing
Internet coupons to targeted customers with perfect and imperfect profile information of customers. The targeted coupons with
perfect information case amounts to dynamic pricing, but without customers' backlash. In the targeted customers with imperfect
information scenario, we consider Internet coupons with fixed face value as well as changing face value cases. We derive the
condition under which the firm should opt for the changing face value Internet coupons. As the firm's customer-centric information
system improves in terms of enhanced targeting accuracy at a lower cost, the changing face value Internet coupons will become
more prevalent.
© 2007 Elsevier B.V. All rights reserved.

Keywords: Customer-centric information systems; Customer-centric marketing; Internet coupons; Electronic commerce

1. Introduction centric” in the e-business era [2]. The resulting

The proliferation of the Internet has led to heightened
global competition for businesses large and small. In
response, it has become fashionable or even essential for
corporations to become “customer-centric” organiza-
tions [14]. This translates to making their company web
sites “sticky”, their customers' “touch points” seamless-
ly integrated, and, above all, their businesses “customer-
⁎ Corresponding author. Department of Information Systems and
Operations Management, Warrington College of Business Adminis-
tration, University of Florida, Gainesville, FL 32611, USA. Tel.: +1
352 392 7068.
E-mail address: hkcheng@ufl.edu (H.K. Cheng).
0167-9236/$ - see front matter © 2007 Elsevier B.V. All rights reserved.
doi:10.1016/j.dss.2007.09.001
fundamental shift in business and customer behavior
entailed by the ubiquitous Internet has never been more
pronounced in marketing — a core component of a
company's value chain that interfaces with customers
[27]. Hence, the goal of becoming a “customer-centric”
organization cannot be achieved without the presence of
the “customer-centric” marketing.
Customer-centric marketing refers to the practice in
which “marketers assess each customer individually and
make a determination of whether to serve that customer
directly or via a third-party,” and customer-centric
marketing “focuses on the needs, wants, and resources
of customers as the starting point of the planning
process.” [p.57, 28]. Customer-centric marketing is
 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620
different from one-to-one marketing in that one-to-one
marketing adopts a product-centric approach by making
product the starting point of the planning process and
providing a customized product for each individual
customer. A good example of applying information
technology to achieve one-to-one marketing is to use
consumers' online browsing and shopping-cart data to
arrive at better product bundles [18]. Sheth et al. [28]
also point out a clear distinction between customer-
centric marketing and relationship marketing since
customer-centric marketing needs to emerge first in
order to have the practice of relationship marketing, but
not necessarily the other way around.
This paper addresses various interesting issues
arising in customer-centric marketing with Internet
coupons, an increasingly popular marketing mechanism
made possible only by the Internet technologies.
Internet coupons, in essence, are those coupons
distributed through the Internet. There are a variety of
different ways to deliver coupons to consumers over the
Internet. Interested readers are referred to Ref. [9] for an
extensive review of Internet couponing firms, their
business models, as well as advantages and disadvan-
tages of Internet coupons.1 Firms benefit from using
Internet coupons as they provide customer-centric
marketing capability, easy tracking and measure,
flexible couponing process with short lead-time for
coupon drop, low coupon distribution costs, and higher
observed redemption rates (reaching up to 20%).2,3
The objective of this research is to provide insights
into such critical questions involved in implementing
customer-centric marketing system with Internet cou-
pons as “How does mass customization and personal-
ization affect business performance?” and “What are the
economic effects of the customer-centric system?”. To
the best of our knowledge, this study is among the first
to provide analytical insights into customer-centric
marketing with Internet coupons.
In this paper, we first show that mass distribution of
Internet coupons will defeat the price discrimination
purpose of using coupons. Our model indicates that the
1
There are four major players currently in the US Internet
Couponing Market: CoolSavings®.com, ValuPage® (owned by Super-
Markets Online®, Inc. which is a subsidiary of Catalina Marketing
Inc.), Planet U™ and Coupons Inc. (formerly Storecoupon). Other
players include DirectCoupons.com, H.O.T.! Coupons.com, Coupon-
Surfer.com, MyCoupons.com, Save.com. The first four represent the
majority and distinct ways to distribute Internet coupons.
2
“Best Practices for Best Results in Internet Consumer Incentives.”
Planet U™ website.
3
“The ACP Guide to Internet Coupons,” The Association of
Coupon Professionals, 2001, available online at the ACP website
www.eden.rutgers.edu/boyden.
607
firm's optimal choice is to not provide coupons at all in
this case as any level of coupon distribution hurts the
firm's profitability. To benefit from distributing coupons
randomly over the Internet, the firm should make sure
consumers incur some disutility when they use these
Internet coupons by requiring registration with the site,
downloading software, printing the coupon and so on,
which are practices adopted by such Internet coupons
firms as Coolsavings.com, Coupons Inc, and ValuPage.
Next, we present the model of a firm that provides a
fixed face value Internet coupon to targeted customers
identified by customer profiling technologies. Using
fixed face value Internet coupons, firms benefit from the
low cost of distributing coupons over the Internet.
However, this approach does not fully exploit the
customer-centric marketing ability afforded by the
Internet. With the advent of tracking and personalization
technologies, firms can individually target each con-
sumer and tailor its coupons according to individual
consumer's preferences and willingness to pay. In this
paper, we explore the models of changing face value
Internet coupons involving two cases where the firm has
perfect information or imperfect information about the
consumers.
We find that it is more profitable for the firm to
introduce the changing face value Internet coupons
when the cost of improving targeting accuracy of the
firm's customer-centric information systems decreases.
The consumer profiling cost is also an important factor
in choosing between a changing face and a fixed face
value Internet coupon. The impact of the customer
profiling cost, however, is not as significant as that of
the targeting accuracy cost.
This paper is structured as follows. In Section 2, we
first review the literature most relevant to our work. Then,
we provide a critical review of Salop's original spatial
model to be extended later to examine various issues of
customer-centric marketing with Internet coupons. In
Section 3, we look at the mass distribution of Internet
coupons. Section 4 presents targeted Internet couponing
models. The discussion of profits and prices as well as the
comparison of different Internet coupon models is given
in Section 5. Section 6 provides concluding remarks and
describes some useful future extensions of our models.
2. Review of literature and Salop's spatial model
2.1. Literature review
Extensive research has been devoted to examining the
effectiveness of coupons in achieving objectives set forth
by coupon providers. Blattberg and Neslin [6] provide an
608 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620
excellent review of the literature on coupons, identifying
“price discriminate” and “reach the appropriate target
group” as two major objectives of coupons. Levedahl [20]
lends support to the price discrimination objective of
coupons. White [31] posits that manufacturers use
coupons as a price discrimination tool to segment
consumers into two classes — those who comparison
shop and those who do not. Recent research by Gopal et
al. [13] discovers that Internet technologies help segment
consumers into those who actively seek out coupons from
fatwallet.com and those who don't. Those consumers who
actively seek out coupons and promotional materials often
engage in reselling at eBay. Narasimhan [21] theorizes
that the consumers with lower opportunity cost for their
time are most likely to use coupons. He finds empirical
evidence that coupon users are more price-sensitive.
Babakus et al. [4] offer further empirical evidence
supporting the price sensitivity argument. Our analyses
focus on the price discrimination dimension of coupons in
the dichotomy of [6].
Narasimhan [21] develops the model for individual
consumer's decision to use coupons and finds that the
trade-off between the value of coupons and the disutility
of using coupons determines which decision is made.
Chiang [11] endogenizes consumers' decision to use
coupons in the overall demand decision and bases this
decision on consumers' utility maximization to measure
the impact of coupons on the category sales. Our study
analyzes a firm's couponing decision which takes into
account individual consumers' decision process of Ref.
[21].
There is a body of research that looks at the firm's
decision process to use coupons as a strategic tool in a
competitive environment. Refs. [5,7,11,26] and most
recently [22] analyze competitive effects of coupons.
Houston and Howe [16] provide a theoretical analysis of
coupons as price discrimination tool under monopolistic
competition, while Ref. [22] finds support for price
discrimination models in oligopoly settings.
The model developed in Ref. [26] is closest to the
models developed in this paper. They develop a two-stage
game theoretic model of pricing and coupon distribution
to compare conventional mass-media coupon drop with
targeted coupons based on consumers' past purchases.
They use a linear spatial model to compare two types of
coupon drop methods. They find that coupon targeting is
not necessarily a replacement to mass media distribution
of coupons as the two methods work differently in
segmenting the market. Our model differs from theirs as
we allow for different levels of mass media coupon drop
and calculate the optimal level of mass media coupon
drop intensity. Another important difference is that their
model does not incorporate individual consumers'
coupon use decision. A constant fraction of consumer
population is assumed to be coupon users and the rest is
assumed to be nonusers. Therefore, the face value of the
coupon and the disutility of using coupon are not
considered in Ref. [26] to determine coupon users and
nonusers. Our models allow individual consumers to
decide whether or not to use a coupon when they receive
the coupon with a certain face value.
Another stream of literature on coupons examines the
objective of using coupons as a targeting tool. Refs.
[3,24,29,33] give examples of coupon targeting through
direct mail programs such as Donnelly Marketing's Carol
Wright program. Shaffer and Zhang [26] state that
coupons should be targeted to competitive firm's
consumers to increase brand sales. With the advent of
Internet tracking technologies, firms can now target each
individual consumer and tailor its coupons according to
individual consumers' preferences and willingness to pay.
Instead of one same coupon, different coupons for
different consumers can be issued for immediate online
use. Kumar et al. [17] construct an Internet coupon
distribution prototype to assure a smooth and secure
couponing process. Rangachari et al. [23] describe how a
consumer's online behavior can be analyzed in order to
determine her desire for a product. Adomavicius and
Tuzhilin [1] present a data mining model that can be used
to develop personal profiles of consumers from their
transactional histories. The firm can then decide on the
coupon and the terms of the coupon according to the
information gathered.
In the next section, we provide a critical review of
Salop's spatial model [25]. Using Salop's spatial model
as the underlying model, we present several extensions
and generalizations to address issues related to Internet
coupons in subsequent sections.
2.2. Review of Salop's spatial model [25]
Consider the market for a single product where the
monopolist produces the product with constant returns
to scale and at a constant marginal cost. Without loss of
generality, the marginal cost of production is normalized
to zero. We use the product characteristics approach to
product differentiation introduced in Ref. [19] and
developed by Ref. [25]. The market is modeled as a unit
circle. The customers are uniformly distributed over the
unit circle. The total number of consumers is assumed to
be constant and normalized to one. Consumers have the
same maximum willingness to pay for the product under
consideration. That is, consumers have a common
reservation price for the product, and this reservation
 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620 609

Table 1 Thus, d ¼ r
p t . The marginal consumers who are distance

Summary of notation d away from their ideal product determine the size of the
r Common reservation price of consumers market.
p Price All consumers whose distance to their ideal product
t Fit cost
d Distance of the marginal consumer from the available product
is less than d will buy the product at price p since r − p −
di Distance of consumer i from the available product dit N 0 for all di b d. That is, all consumers along the arc
k Firm's total market coverage (share) from A to C will have a positive surplus. Since
k Coupon distribution intensity (fraction of consumers who get a consumers within distance d of point B will buy, the
mass distributed coupon) total market size of buyers is 2d. Let Π denote
 the profit
C(.) Cost of coupon distribution
a1 Fixed cost of mass distribution of coupons
of the firm. Then, one has P ¼ 2dp ¼ 2 r
p t p.
b1 Marginal cost of mass distribution of coupons The monopolist solves the following maximization
f Face value of the coupon problem.
fi Face value of the coupon given to consumer i h  r
p i
fm Maximum possible face value of the coupon Max P ¼ Max 2 p
x Distance of the marginal consumer in coupon segment from the p p t
marginal consumer in the no coupon segment  
r
2p*
xi Distance of consumer i in coupon segment from the marginal First order condition requires dP dp ¼ 2 t ¼ 0. Since
d2 P
consumer in the no coupon segment dp2 ¼
4
t b0 for all t N 0, the second order condition for
x̂i Firm's estimate of the distance of consumer i in coupon segment maximization is also met. Hence, we find the solution as
from the marginal consumer in the no coupon segment
xm Maximum distance of the marginal consumer who is given
r r2 r
p* r
firm's changing face value coupon p* ¼ ; P* ¼ ; and d* ¼ ¼ :
b2 Cost of consumer profiling 2 2t t 2t
q Targeting accuracy
a2 Targeting accuracy cost Let k be the percentage of the market that is covered, or
simply the market coverage. Then, k* ¼ 2d* ¼ rt. When
r ≥ t, it is optimal for the monopolist to serve all
price is denoted by r. Each consumer is assumed to consumers. If r b t, some consumers are not served at the
purchase at most a single unit of the product, and all equilibrium. We assume that r b t so that the monopolist
consumers have perfect information about different has incentive to introduce coupons to those customers
market offerings and prices. A summary of the notation who would not purchase otherwise.
used in the paper is given in Table 1.
Consumers have heterogeneous preferences and are 3. Mass distribution of Internet coupons with no
uniformly distributed along the unit circle according to targeting
their preferences for the product. Each consumer's
location on the unit circle represents her ideal product. When a firm does not have a customer-centric
Consumers incur a fit cost t per unit distance, as they fall information system to acquire individual consumers'
away from their ideal product. The fit cost represents preferences, it cannot differentiate its coupon provision
consumers' dissatisfaction due to the difference between among consumers according to consumers' locations in
the characteristics of the product supplied by the firm
and those of consumers' ideal product. A product is
represented by a point on the unit circle. The product is
provided at price p. All of these assumptions are
commonly made in the economics, marketing, and
information systems literature, see Ref. [8,12,15].
In Fig. 1, the monopolist markets the product at point
B. We define the “marginal” consumers, located at points
A and C in Fig. 1, as those who are indifferent between
buying and doing without the product offered at point B.
These two marginal consumers (A and C) are indifferent
between buying and not buying, and the following
equation holds.

r
p
dt ¼ 0 ð1Þ Fig. 1. Salop's spatial model [25].

610 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620
the market, or some proxy thereof. The firm's only
choice is to distribute coupons randomly, either through
traditional coupons distribution methods or over the
Internet. As the cost of distributing coupons over the
Internet is lower than the traditional distribution
channels, the firm will naturally choose to distribute
them over the Internet. Using traditional paper coupons
requires certain effort on the consumers' part to clip,
organize, and use them. This required effort is what
allows firms to use traditional coupons as price
discrimination tools. Cheng et al. [10] model this effort
and find that this effort is very critical to the success of a
couponing campaign. However, for some mechanisms
of Internet couponing that we describe earlier, this
consumer's effort on using the coupons distributed over
the Internet is negligible. In this section we show the
undesirable consequence to the firm when the disutility
of using Internet coupons becomes essentially zero.
Assume that the firm will give coupons to λ fraction
of consumers randomly. Furthermore, we assume that
each consumer is equally likely to receive a coupon
from the firm. Therefore, the probability that a consumer
will get a coupon is λ. The costs of distributing coupons
in this case will be linear in this fraction (or probability).
This is because the marginal cost of distributing
coupons over the Internet is constant in the number of
consumers that receive the coupons. Our cost function C
(λ) will take the following form:
C ðkÞ ¼ a1 þ b1 k:
In this case, consumers who would buy without a
coupon will still buy using the coupon, if they receive
one, since there is no disutility associated with using the
coupon. This segment of consumers is represented by
the arc AC in Fig. 2 with λ proportion of them receiving
and using the coupon. The consumers who would not
Fig. 2. Internet coupons with negligible disutility of using coupons.
buy the product without a coupon will not buy if they do
not receive a coupon. If this latter segment of customers
receives a coupon, their purchase decision will depend
on the face value of the coupon. Let the “marginal”
consumers of this group, represented by D and E in
Fig. 2, be those who receive the coupon with the face
value f and are indifferent between buying and not
buying. Then, one has
r
p
dt
xt þ f ¼ 0; ð2Þ
where x denotes this segment of consumers who will
buy the product only with coupon.
Since r−p−dt= 0 describes the decision of marginal
consumers A and C of the segment of consumers who will
buy the product with or without the coupon, we have x ¼ ft .
Therefore, the expected value of x can be found as
kf
E ð xÞ ¼ P
x ¼ PrfReceiving a coupong  x ¼ :
t
The same result can be derived if we look at the
problem from a different perspective. Assume that the
marginal consumers get the coupon for sure but the face
value of the coupon is a random variable. The face value
of the coupon is f with probability λ, and 0 with
probability 1 − λ. Therefore, the expected value of the
coupon face value is E( f ) = f¯= λf + (1 − λ)0 = λf. Hence
the expected value of x can be calculated as follows.
  P
P f Eð f Þ f kf
x ¼ E ð xÞ ¼ E ¼ ¼ ¼ :
t t t t
The total revenue of the firm consists of two parts.
The first part of the revenue, denoted by Π1, is derived
from the segment of consumers who will buy the
product even without a coupon. For this segment
of consumers, the λ fraction of consumers who get
the coupon and use it will pay ( p − f ) whereas the others
1 − λ fraction pay the full price p. Hence, Π1 = 2[(1 − λ)
dp + λd( p − f )]. The second part of the revenue, denoted
by Π2, results from the segment of consumers who will
not buy the product without a coupon. Thus, P2 ¼
P
2 xð p
f Þ ¼ 2kft ð p
f Þ. Taking all revenues and cost
into consideration, the firm's total profit equals ΠTotal =
Π1 + Π2 − C(λ). That is,
2kf
PTotal ¼ 2½ð1
kÞdp þ kd ð p
f Þ þ ð p
f Þ
a1
b1 k:
t
After some algebra, we have the following profit
function for the monopolist.
2

PTotal ¼ rp
p2
krf þ 2kpf
kf 2
a1
b1 k:
t
 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620
Then the firm solves the following problem.
 distributed paper coupons that impose disutility of usage to
2

Max rp
p
krf þ 2kpf
kf
a1
b1 k
2 2
p;f ;k t
ð3Þ
Subject To
0VkV1 ð4Þ
0VpVr ð5Þ
0Vf Vp ð6Þ
r
p 1
0V V ð7Þ
t 2
f 1 r
p
0V V
ð8Þ
t 2 t
The constraints given in inequalities (4), (5), and (6)
guarantee nonnegative and feasible values for the
decision variables λ, p, and f. Inequality (7) makes
sure that the size of the segment d is between 0 and one
half. Finally, inequality (8) ensures that the size of the x
segment is nonnegative and not greater than the
remaining market size 1/2 − d. The solution of this
model leads to4
ð1
k* Þf * ¼ 0:
This implies two cases — either f ⁎ is 0 and λ⁎ is
free, or λ⁎ is 1 and f ⁎ is free. In the first case, the model
suggests no issuance of coupon, as zero face value
implies no coupon distribution. In the second case
where λ⁎ = 1, we have P*Total ¼ r2t
a1
b1 : This profit
2
figure is less than that of the no coupon issuance case.
Therefore, the firm's optimal choice will be to provide
no coupons at all. Without a customer-centric informa-
tion system to help targeting consumers, a mass
distribution of Internet coupons does not help the pro-
fitability of the firm. This results from the fact that the
firm will not be able to price discriminate when the
disutility (i.e. effort) to use the Internet coupons
becomes negligible.
In order for the firm to still be able to price discriminate,
it needs a mechanism to impose certain effort for the
consumers to use coupons, even with Internet coupons.
For instance, Coolsavings.com and Coupons Inc. require a
software download. ValuPage grants no immediate cash
discount, the reward can only be redeemed at the next visit.
4
The solution details to this model as well as the solutions to
subsequent models in this paper have been delegated to the Appendix.
611
Cheng et al. [10] examine the case for mass media
consumers. They find similar conclusions for paper
coupons. Using the Internet for mass distribution of
coupons without targeting prevents the firm from realizing
all the benefits the Internet has to offer. In the next section,
we analyze the targeted distribution of Internet coupons as
an alternative to mass distribution.
4. Models of targeted Internet coupons
Internet coupons are revolutionary mechanisms for the
firm to achieve customer-centric marketing capabilities as
the Internet technology enables the firm to target
individual consumers. This section models a monopolist's
decision to use Internet coupons to target consumers
according to their preferences for the product with an aim
to improve its profits. In Section 4.1, we first analyze a
benchmark case where a firm can target consumers
perfectly without incurring any costs. This model is rather
unrealistic and is used only as the base model for
comparison with more realistic models that include costs
of consumer profiling and imperfect targeting introduced
in Section 4.2. With imperfect targeting and costs of
consumer profiling, the firm has two alternatives to induce
customers to buy the product by providing them with
either a coupon with fixed face value or a different coupon
with changing face value for each individual consumer.
For both models in Section 4.2, we follow a two-period
pricing and couponing process. In the first period, the firm
introduces the product and makes the pricing decision.
The firm's customer-centric information system records
those consumers who buy the product without a coupon in
the first period. The firm targets those consumers with a
high fit cost who would not be able to buy the product at
the regular price by introducing coupons in the second
period. The firm's objective in the second period is to find
the most effective form and optimal face value of Internet
coupons. We ignore the discount factor in our two-period
model for simplicity.
4.1. Targeted coupons with free perfect information
When the firm has detailed information regarding
consumers' shopping behavior and preferences, it can
estimate their willingness to pay. With the flexibility
afforded by customer-centric information systems, firms
can change the face value of their coupon offerings
according to individual consumers' preferences and
shopping behavior. Instead of one same coupon,
customized coupon for each consumer can be issued
for immediate online use. We assume that the coupon is
612 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620
given for one product and it is instantaneous as soon as
the face value is determined. Coupons distributed this
way will not impose any disutility of usage.
With the help of coupons, a monopolist can charge
higher prices to some consumers and lower prices to
others and segment consumers effectively. However, with
traditional paper coupons the firm is limited to very small
number of different coupons. In practice, a conventional
firm generally uses one coupon with the same face value
for all consumers. Customer-centric information systems
enable firms to target their consumers in ways that were
considered infeasible before.
We again consider a monopolistic market for a single
product with the exact same characteristics described in
Section 3 — zero marginal production cost, product
characteristics approach to product differentiation, unit
circle model with the total number of consumers uniformly
distributed and normalized to one, a common reservation
price r, and heterogeneous consumer preferences repre-
sented by the fit cost t.
In the model of targeted coupons with perfect infor-
mation, we assume that each consumer's true location on
the unit circle can be identified perfectly with an infor-
mation gathering mechanism. The firm may offer Internet
coupons to interested customers only if they provide rele-
vant information to the firm. For instance, the users of
ValuPage.com Internet coupons need to register their pref-
erences along with zip code information in order to receive
the desired coupons. We assume that the cost of the perfect
information is fixed and normalized to zero. This unrealistic
assumption will be relaxed in subsequent models.
Fig. 3 describes the essence of the model of targeted
coupons with perfect information. The firm's product is
marketed at point B. Assume that the two marginal
consumers located at points A and C are indifferent
between buying and not buying the product at price p.
Fig. 3. Targeted Internet coupons with perfect information.
Both A and C are distance d away from the product and
hence incur fit cost dt. For these consumers, r− p − dt= 0
holds and we have d ¼ r
p t . The profit for this

no  coupon
(NC) segment is given by PNC ¼ 2dp ¼ 2 r
p t p.
To entice those consumers who did not buy the product
at price p in the first period, the firm decides to issue them
coupons in the second period. Instead of distributing one
fixed face value Internet coupon, the firm can tailor the
coupon for each individual consumer. The firm's choice
of the coupon face value for individual i, denoted by fi, is
just enough to induce consumer i to buy the product.
Since r − p − dt = 0, r − p − dit b 0 for all di N d. If we let xi
denote consumer i's distance from the closest marginal
consumer at point A or C, we have di = d + xi. Thus,
consumer i's net utility for the product is
r
p
ðd þ xi Þt ¼ r
p
dt
xi t ¼
xi t:
Then, the following condition should hold to make
consumer i buy the product: − xit + fi ≥ 0. As we assume
that the consumers who are indifferent will buy the
product, the firm should set the face value of the coupon
for consumer i equal to the incremental fit cost this
consumer incurs compared to the closest marginal
consumer A or C. That is, at optimality we have fi = xit.
Since we assume no cost of producing an extra unit of
the product, the firm is willing to provide coupon face value
up to p, i.e., fi ≤p. Let m denote the consumer with the
largest negative net utility for the product before receiving a
coupon, and let xm denote her distance from the closest
marginal consumer. This implies fm =p or similarly xmt =p.
Hence, xm ¼ pt. Therefore, the firm will provide coupon
face value, fi =xit for all xi V pt. The firm's profit from the
coupon segment can be calculated accordingly.
In this benchmark model we assume that the process
of learning consumers' location can be done without any
costs. The firm's profit from the coupon segment is
Z xm Z p
t
PC ¼ 2 ð p
f ð xÞÞdx ¼ 2 ð p
xt Þdx:
0 0
Hence, the total profit is given by
 r
p Z p
t
PTotal ¼ PNC þ PC ¼ 2 p þ 2 ð p
xt Þdx
t 0
2rp
p2
¼ :
t
Then, the firm' problem can be formulated as follows.

2rp
p2
Max ð9Þ
p t
 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620
Subject To
0VpVr ð10Þ
r
p 1
0V V ð11Þ
t 2
p 1 r
p
0V V
ð12Þ
t 2 t
The constraint in inequality (10) is straightforward.
Inequalities (11) and (12) are the same as inequalities (7)
and (8) presented earlier.
We find the solution to this problem as (see the
Appendix)
* ¼ r2
p* ¼ r; PTotal ; and d* ¼ 0:
t targeting with imperfect and costly information.
The market coverage k* ¼ 2rt. When rz 2t , it is optimal
for the monopolist to serve all consumers. If rb 2t , some
consumers are not served at the monopolist's optimal price.
The results of this basic model amounts to perfect (first-
degree) price discrimination. Each individual consumer is
charged her true reservation price for the product. However,
this is not achieved through dynamic pricing but through
the use of the changing face value coupons. The end results
in these two alternatives are virtually the same; however,
they generate different perceptions among consumers.
When Amazon.com was found to use its enormous
consumer information database to price discriminate,
charging higher prices to loyal consumers that are frequent
purchasers and supposedly less price sensitive, the
consumers' reaction was nothing short of a backlash
[30]. Amazon.com denied the allegations of implementing
dynamic pricing and claimed that it was merely running
price tests. Even though dynamic pricing has been
effectively used in such industries as airline and travel
industries, its use by an online firm to sell DVDs stirred up
a lot of negative emotion among consumers.
The situation is rather different with coupons. The
use of coupons as price discrimination tool does not
seem to have the same adverse effect that dynamic
pricing has on consumers. Jupiter Media Metrix analyst
Jared Blank support this view point [32].
“…Merchants that want to price a new product
dynamically (especially one that consumers will discuss
in chat rooms) should send coupons of differing values
to customers, rather than adjusting the price of the item
on the site. Consumers are not offended when others
receive coupons of differing values; this happens often
with consumer packaged goods…”
613
One possible reason for consumers' more favorable
reactions to achieving the same outcome of dynamic
pricing by dynamic coupons may be the fact that the price
is announced and known by all consumers. All consumers
observe the same disclosed price but not necessarily the
face value of coupons when they visit the firm's online
establishment. With the use of dynamic coupons,
consumers might very well feel that they are getting a
good deal on the product. Much research is needed to
uncover the exact psychological reasoning of consumers.
However, it is beyond the scope of this study. We are not
interested in why consumers react differently, but rather
what the firm should do, given these different reactions, to
effectively price discriminate, serve more consumers, and
improve its profits with Internet coupons along the way. In
the next section, we relax some of the assumptions made
in the benchmark model and analyze Internet coupon
4.2. Targeted coupons with imperfect information
With imperfect and costly information, the firm can
choose between providing a fixed face value coupon or
changing face value coupons to different consumers. In
the following two subsections, we present models for
these two alternatives. We first analyze the fixed face
value coupons case.
4.2.1. Fixed face value Internet coupons to targeted
consumers
We model the couponing process as a two-period
decision process. As the consumers who buy without the
coupon reveal themselves in the first period, the firm has
no interest in targeting these consumers. It will not give
coupons to those consumers who would buy its product at
price p and let them buy the product without a coupon in
the first period. The firm will issue its Internet coupon in
the second period. Fig. 4 displays the dynamics of this
couponing model.
The marginal consumers in the no coupon segment are
located at points A and C, and thus r − p − dt = 0 holds at
these two points. In the segment where the coupon is
provided, the marginal consumers who are indifferent
between buying and not buying are located at points D
and E (see Fig. 4). We model the case of Internet coupons,
such as Planet U™'s paperless coupons, where the
disutility of collecting and using the coupon is negligible.
Therefore, r − p − dt − xt + f = 0 holds for the marginal
coupon users at points D and E where x is described as
in Section 4, the segment of consumers who will buy the
product only if they receive the coupon. As r − p − dt = 0,
we have x ¼ r
p
dtþf
t ¼ ft .
614 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620

where
PNC ¼ 2dp; PC ¼ 2xð p
f Þ; and C ð xÞ ¼ 2b2 x:

After some algebra, we have PTotal ¼ 2t ðrp
p2 þ

pf
f 2
b2 f Þ. Therefore the firm's profit maximiza-
tion problem can be formulated.
2

Max rp
p2 þ pf
f 2
b2 f ð13Þ
p;f t

Subject To
0VpVr ð14Þ

0Vf Vp ð15Þ

r
p 1
0V V ð16Þ
t 2

f 1 r
p
0V V
ð17Þ
t 2 t
The constraints given in Inequalities (14)–(17) and
their interpretations are the same as those in Inequalities
(5)–(8). The solution to this problem is characterized by
(see the Appendix)
Fig. 4. Targeted Internet coupons with imperfect information. r
2b2 2r
b2 r
2b2
f* ¼ ; p* ¼ ; and x* ¼ :
3 3 3t

Additionally, d* ¼ rþb 3t : Hence the market coverage

2
In this section the firm maximizes its profit by taking
is k* ¼ 3t2 ð
2r
b2 Þ. And finally the total profit is
both the price and the face value of the coupon as * ¼ 2 r2
rb þ b2 .
PTotal 3t 2 2
decision variables. We would like to see if the optimal
The following proposition summarizes the results of
price changes with the provision of coupons. Further-
this model.
more, the firm will want to have the flexibility to change
its pricing structure anticipating that it will provide Proposition 1. Only if 2b2 brb 3t
2b 2
2
will a firm introduce
coupons later on. We assume that the consumer profiling fixed face value Internet coupons. When this is the case, the
technology of customer-centric information systems has face value of the coupon is r
2b 3 and the firm will distribute
2

constant returns to scale as Amazon.com and Yahoo can
acquire consumers' “purchasing and preference profile”
information at a constant marginal cost for all
consumers [12]. Therefore the firm providing Internet
coupons will incur the cost of consumer profiling as a
linear function of the coupon segment x. The firm will
have to observe consumers to decide whether or not the
consumers would buy the product with Internet coupons
if it sets the face value at f. We assume that the firm
incurs consumer profiling cost b2 per unit distance of
observed market segment. Then, the firm's total net
profit equals
PTotal ¼ PNC þ PC
C ð xÞ;
2ðr
2b2 Þ
coupons to 3t percent 2
of the consumers, increasing
the total profit by ðr
2b
6t
2Þ
. Otherwise, it is not profitable for
the firm to introduce coupons.
In this model it is optimal for the firm to increase its
price for the no coupon segment and provide coupons to
the rest of the consumers. In contrast, [10] shows that the
conventional paper coupon provider did not have to
increase its price to maximize its profits with paper
coupon promotions. It is optimal for the conventional
coupon provider to charge the same price with or without
coupons. However, with Internet coupons, firms should
increase the price for consumers with lower fit cost for the
product, i.e. the consumers that are not given a coupon
 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620
will need to bear higher prices. Not only is this price
higher than what the consumer receiving the coupon pays
but also higher than the price that would be charged if no
coupons are provided at all. Comparisons of results from
this model with those from others are given in Section 5.
In the next subsection, we introduce the changing face
value coupons in the case of imperfect targetability.
4.2.2. Changing face value Internet coupons to targeted
consumers
We now analyze the provision of the changing face
value coupons when the firm's targeting ability is less
than perfect. Our aim is to find conditions under which the
firm will choose the changing face value coupons over the
fixed face value coupons in the presence of imperfect
information. If the firm estimates consumer i's location in
terms of her distance to the closest marginal consumer to
be x̂i and the true location of the consumer i turns out to be
xi, one of the three possible cases arises: (1) xi N x̂i, i.e., the
firm underestimates the consumer's fit cost, and the
consumer will not buy as the coupon face value she is
given is not enough to offset her fit cost; (2) xi = x̂i, i.e., the
firm estimates the consumer's fit cost perfectly, the
consumer will be indifferent and we assume she will buy;
and finally (3) xi b x̂i, i.e., the firm overestimates the
consumer's fit cost, and the consumer will buy and enjoy
some surplus as the face value of the coupon is larger than
the minimum required amount to induce her into buying.
Suppose that consumer profiling of the firm's
customer-centric system works imperfectly. It under-
estimates or overestimates consumers' fit cost from time
to time. Assume that the system's accuracy of identifying
a consumer's true fit cost is independent of her preference
for the firm's product (i.e., her true fit cost). Suppose also
that the system either overestimates or perfectly estimates
a consumer's fit cost with probability q, i.e. q = Pr{xi ≤ x̂i}
for all consumers xi's in [0, xm]. Chen, el al. [8] employ a
similar probability measure to model imperfect target-
ability in individual marketing setting. Given this
probability, we can reformulate the firm's maximization
problem. Let πiC denote the firm's profit from consumer i
in the coupon segment. The value πiC, given the face
value of the coupon, fi, is given by
615
Thus, the expected profit from consumer i is E(πiC) =
q(p − x̂it). The total profit of the firm from the entire
coupon segment can be calculated by simply integrating
its profit from individual consumers over the interval
x̂i ∈ [0,xm]. In this case the firm may not be willing to
provide coupons with a face value up to the price as
there are costs associated with changing the face value
of the coupon. The total profit within this range is
Z xm
PC ¼ 2 qð p
x̂t Þd x̂:
0
The cost of consumer profiling with accuracy q is
given as follows:
C ð x; qÞ ¼ 2b2 xm þ a2 q2 :
The firm incurs a linear consumer profiling cost b2
similar to the fixed face value coupon case. We assume
that the accuracy level of the technology to estimate
consumers' locations on the unit circle is exogenous to
our model. This assumption reflects the fact that these
technologies are not available in the entire spectrum of
accuracy levels from 0 to 1. The firm's choice of
accuracy is not continuous. The firm solves its
optimization problem for a set of given technologies
with associated accuracy levels and picks the best one.
We assume that the firm incurs a quadratic cost for
achieving accuracy level q, which represents the
increasing marginal cost of accuracy provision. Hence,
the firm's total profit is given by
PTotal ¼ PNC þ PC
CZð x; qÞ
r
p xm
¼2 pþ2 qð p
xt Þdx

t 0

2b2 xm þ a2 q :
2
After some algebra we have PTotal ¼ 2rp
2p þ2tqpx
qxt t
2tb x
ta q .
2 2 2 2
m m 2 m 2
Therefore the firm solves the following problem.
 
2rp
2p2 þ 2tqpxm
qx2m t 2
2tb2 xm
ta2 q2
Max
p;xm t
ð18Þ
 Subject To
p
fi with probability q
piC ¼ :
0 with probability 1
q
0VpVr ð19Þ
Or, if we write the same value in terms of the
consumer's location on the unit circle, 0Vf Vp ð20Þ

p
x̂i t with probability q r
p 1
piC ¼ : 0V V ð21Þ
0 with probability1
q t 2
616 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620

1 r
p “no coupon segment” appears for all r N 0. Because the

0 V xm V
ð22Þ
2 t firm is not giving coupons to some consumers, it cannot
The constraints given in Inequalities (19)–(21) and perform first degree price discrimination. There are some
their interpretations are the same as Inequalities (5)–(7) consumers who are charged the same price, p. Proposition
and their interpretations. Inequality (22) is similar to (12). 2 summarizes the results of this section.
The profit maximizing solution gives p* ¼ r
b ⁎
2
q and xm ¼
2

qr
2b2 pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
qtð2
qÞ (see the Appendix). The profit for this case is Proposition 2. Only if 2bq2 þ 2a2 t ð2
qÞb r b tð2
q Þ
2b2
2ð1
qÞ
* ¼ a2 tq4
2a2 tq3
2rb2 qþr2 qþ2b22
PTotal 2tqð2
qÞ : Further, we have d* ¼ will a firm introduce the changing face value Internet
r
qrþb2
t ð2
qÞ: The market coverage is equal to k* ¼ 2tððr
b 2Þ
2
qÞ :
coupons. When this is the case, the firm will distribute
When r z tð2
q2Þþ2b2 , it is optimal for the monopolist to coupons to 2ðqtqr
2b2Þ
ð2
qÞ percent of the consumers, increasing
2a tq4
4a tq3 þr2 q2
4rbqþ4b2
serve all consumers. If r b tð2
q2Þþ2b2 , some consumers are the total profit by 2 2
2tqð2
qÞ
2
. Otherwise, it
not served at the equilibrium. With imperfect information, is not profitable for the firm to introduce coupons.

5. Discussion of customer-centric marketing with Internet coupons

In this section, we analyze the Internet couponing models in detail and gives comparative statics of the two models
presented in the previous section.

5.1. Profit and price analysis of the Internet couponing models

A summary of Internet couponing models for a monopolist, including the no coupon model, is given in Table 2.
The most important result in this section describes the impact on the price of the product when a firm chooses to
provide Internet coupons, whether they are fixed face value or changing face value. This result is stated in the following
proposition.

Proposition 3. When an Internet couponing method is more profitable than providing no coupons, the monop-
olistic firm will increase its price to the segment of the consumers who will buy the firm's product without coupons.

When issuing Internet coupons, the firm always prefers to increase its price for the segment of consumers who have
lower fit costs and thus will buy the firm's product without coupons. Moreover, there is another noteworthy
result of Internet couponing models of the previous section. The price is a decreasing function of the consumer
profiling cost.

Table 2
Comparison of the Internet couponing models
No coupons Internet Coupons with free Fixed face value Internet Changing face value Internet
perfect information coupons coupons
Price, p⁎ r r 2r
b2 r
b2
2 3 2
q
xt h i r
2b2  xt
Coupon Value, f ⁎ 0 p qr
2b
xa 0; 3 xa 0;
t qtð2
qÞ
No Coupon Segment, d⁎
r rþb2 r
qrþb2
2t 0
3t tð2
qÞ
r
2b2
Coupon Segment, x⁎
2r qr
2b2
0 t 3t qtð2
qÞ
Market Coverage, k⁎
r 2r 2 2ðr
b2 Þ
t t 3tð2r
b2 Þ tð2
qÞ
r2 r2 2
2  a2 tq4
2a2 tq3
2rb2 q þ r2 q þ 2b22
Firm's Profit, π⁎ r
rb2 þ b22
2t t 3t 2tqð2
qÞ

2  –
Consumers' Surplus r2 0 2r
2rb2 þ 5b22
4t
9t

2  –
3r2 r2 8r
8rb2 þ 11b22
Total Welfare
4t t 9t
 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620 617

Proposition 4. The improvements in consumer profiling technologies that lead to decreased profiling cost will
make the monopolistic firm charge more for its product.

Proposition 4 implies that the firm is going to increase its price if the cost of customer profiling decreases. The
advancement of profiling technology will actually make the monopolist charge more for the product. This is true
for both Internet couponing models, see Table 2. A follow up result is that the firm will also increase the face value
of its coupon in the fixed coupon case with lower costs of profiling. Similarly, in the changing face value coupons,
the firm will give more consumers coupons if the profiling technology becomes cheaper.

5.2. Comparison of targeted Internet couponing models

The comparison of the prices, the size of the no coupon segments, and the market coverage of the two targeted
Internet coupons models presented in Sections 4.2.1 and 4.2.2 is summarized by the following proposition.
rþb2
Proposition 5. If qb 2r
b 2
we have
i) The price with the fixed face value Internet coupons is greater than the price with the changing face value
Internet coupons,
ii) The size of the no coupon segment with the fixed face value Internet coupons is less than the size of the no coupon
segment with the changing face value Internet coupons,
iii) The size of the coupon segment with the fixed face value Internet coupons is larger than the size of the coupon
segment with the changing face value Internet coupons,
iv) The market coverage of the fixed face value Internet coupons is larger than the market coverage of the changing
face value Internet coupons.

Which of the two targeted Internet couponing models yields more profits depends heavily on the parameters
of the models. Conditions on which targeted couponing model generates more profit than the other can be
derived in terms of parameter values but they are rather complicated and hence do not allow easy interpretation.
For example we have the following condition for the value of the common reservation price.
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2b2 q þ 2b2 q2 þ 2
6a2 tq6 þ 15a2 tq5
6a2 tq4
3b22 q4 þ 12b22 q3
15b22 q2 þ 6b22 q
rN
2ð2q2
qÞ
If this condition holds, the changing face value Internet coupons will always provide higher profit than the fixed face
value Internet coupons. Therefore, in this subsection we give a numerical example to show how the profitability of the
two models change with respect to three important parameters of the model — the consumer profiling cost b2, the
targeting accuracy cost a2 and the accuracy level q. Fig. 5 shows the effect of parameter changes on the profits of the
two models.

Fig. 5. Profit comparison of the Internet couponing models.

618 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620

The vertical axis represents the profit difference between the changing face value Internet coupons and the fixed face
value Internet coupons. A positive value indicates higher profits for the changing face value case. The parameter values are
r = 1 and t = 2. The consumer profiling cost coefficients, b2, are 0.01 for the figure on the left, and 0.1 for the figure on the
right. The targeting accuracy cost parameter a2 increases from 0.01 to 0.15 from left to right (one value for each curve) in
both figures in shown increments. The feasible values of q for the first figure are in the interval [0.01, 1.00] and for the
second figure they are in the interval [0.10, 1.00]. Outside these two intervals, coupon provision is not a feasible option.
The first result of interest is the effect of the targeting accuracy cost parameter a2. Ceteris paribus, as a2 decreases
and makes the curves in Fig. 5 moving toward above the x-axis, it becomes more profitable for the firm to choose the
distribution of the changing face value Internet coupons over the fixed face value ones. In the event of increasing cost
of targeting accuracy, however, the targeting accuracy has to become higher to justify the use of changing face value
Internet coupons. For some value of targeting accuracy cost, no accuracy level is large enough to make the changing
face value Internet coupons a viable option. The firm is better off with the fixed face value coupons.
The effect of the consumer profiling cost b2 is also an important decision factor but its impact is not as significant as
that of the targeting accuracy cost. If the consumer profiling cost decreases, ceteris paribus, the changing face value
Internet coupons will be more desirable.
As reported in Ref. [10], changing face value Internet coupons are not widely used in practice, although
technologies to do so are already in place. Our models suggest that as the cost of targeting accuracy improves, we
would observe more prevalent use of changing face value Internet coupons.

6. Conclusions, limitations and future extensions
We develop an analytical framework to analyze
different Internet couponing strategies for a monopolis-
tic firm providing a single product. Our models show
that the distinct characteristics of Internet coupons call
for a careful selection of a firm's couponing strategy
that suits the firm's technological capabilities. The firm
that does not have the ability of a customer-centric
information system to identify and profile individual
consumers will not be able to benefit from Internet
couponing through mass distribution of their coupons
over the Internet. We find that the firm will increase its
price to the segment of the consumers who have lower
fit costs and will buy the firm's product without coupons
when it is more profitable to distribute targeted Internet
coupons even though the information gathered about the
firm's customers is not perfect with the implementation of
a customer-centric information system. A decreasing cost
of customer profiling technologies will result in a higher
price for the firm's product. As the firm's customer-
centric information system improves in terms of enhanced
targeting accuracy at a lower cost, the changing face value
Internet coupons will become more prevalent.
This research is not without limitations. This paper
assumes that consumers are not aware of the two stage
process used for identifying purchasers at the regular
price and the potential coupon users. One possible
approach to relax this critical assumption is to introduce
a discount factor for consumers where the consumers
with high discount factor would buy in the first stage at the
regular price while those with low discount factor would
wait for the coupons in the second stage. Since the
valuation and discount factor are arguably correlated, it
should be a worthy future research to examine whether the
main results of the paper still apply in this case.
This research studies the implications of Internet
coupons issued by the manufacturer. It should be of interest
to analyze the retailer-based coupons such as those for 10%
of all apparel. The retailer-based coupons scenario will not
satisfy a fundamental assumption of the Salop model [25]
and extensions thereof — the product under consideration
being a single product, not multiple products. Intuitively,
the general predictions of the propositions in this paper
should still hold. However, the parameters conditions in
Propositions 2 and 5 will be difficult to ascertain.
A natural extension to our work is to examine the
firm's decision to use coupons as a strategic tool in a
competitive environment. One possible extension to this
study is to consider the case of multiple products where
the effects of substitution and complementarity among a
firm's products are analyzed. Another possible future
work is to consider repeat purchases. Our models assume
that consumers are in the market for a unit quantity of the
product. If we allow for repeat purchases, the benefits of
consumer profiling will be even greater. First, the firm will
be able to collect more information. Second, it will use the
same information to target consumers multiple times,
which will result in cost savings.
Acknowledgement
The authors gratefully acknowledge the very detailed
and constructive comments and suggestions from three
anonymous reviewers, which greatly help improve the
paper. We thank seminar participants of Georgia Institute
 H.K. Cheng, K. Dogan / Decision Support Systems 44 (2008) 606–620 619

of Technology, Penn State University, University of r
r

t ¼ 0. The market coverage is k* ¼ 2d* þ 2xm ¼
Arizona, University of Connecticut, University of Illinois 0 þ 2 pt ¼ 2rt.
at Chicago, University of Texas at Dallas, and Workshop
on Information Systems and Economics 2002 for their A.3. Internet fixed face value coupons
useful comments. Needless to say, any remaining errors
belong to the authors. First order conditions lead to
dPTotal ðr
2p* þ f * Þ
Appendix A. Model solutions ¼2 ¼ 0;
dp t
A.1. Internet mass distribution of coupons and

First order conditions require dPTotal ð p
2f *
b2 Þ

¼2 ¼ 0:
dPTotal ðr
2p* þ 2k*f * Þ df t
¼2 ¼ 0;
dp t The Hessian matrix for this model is negative definite.
Therefore the second order condition is satisfied. From
dPTotal ð
k*r þ 2k*p*
2k*f * Þ rþf ⁎
¼2 ¼ 0; dp ¼ 0 we have p* ¼ 2 . From df ¼ 0 we have
dPTotal dPTotal
df t
p⁎ = 2f ⁎ + b2. Hence, f * ¼ r
2b 3
2
, p* ¼ 2r
b
3
2
and
and x* ¼ t ¼ 3t . Additionally, d* ¼ t ¼ 3t : Hence
f r
2b2 r
p rþb2

 the market coverage is

k* ¼ 2x þ 2d ¼ 3t2 ð2r
b2 Þ.
dPTotal
rf * þ 2p*f *
f *2 * ¼ 2 r2
rb þ b2 .
Total profit is PTotal
¼2
b1 ¼ 0: 3t 2 2
dk t
The Hessian matrix for this model is negative semi- A.4. Changing face value Internet coupons to targeted
definite, satisfying the second order condition.
⁎ ⁎
consumers
From dPdpTotal ¼ 0 we have p* ¼ rþ2k2 f . From dPdfTotal ¼ 0
⁎ ⁎
⁎ rþ2k⁎ f ⁎
we have p* ¼ rþ2f 2 provided λ ≠ 0. Hence, 2 ¼ rþ2f
2 ,
First order conditions require
leading to (1−λ⁎)f ⁎ = 0. dPTotal 2r
4p* þ 2tqx⁎m
There are two cases — either f ⁎ is 0 and λ⁎ is free, or ¼ ¼ 0;
dp t
λ⁎ is 1 and f ⁎ is free. If the first case is true, the model
reduces to the no coupon case, as zero face value implies and
no coupon distribution. If the second case is true, i.e. dPTotal 2tqp*
2qx⁎m t 2
2tb2
λ⁎ = 1, we have the following: p* ¼ rþ2f
⁎
¼ ¼ ¼ 0:
2 þ f *.
r
2
4 4 4 42
dxm t
From dPdkTotal ¼ 0, we have 2 ð
rf þ2pt f
f Þ ¼ b1 or
The second order condition is met since the Hessian

rf * þ 2p*f *

f *2 ¼ tb21 . Substituting p* ¼ 2r þqfffiffiffiffi*
matrix is negative semi-definite.
gives
rf * þ 2 2r þ f * f *
f *2 ¼ tb21 , hence f * ¼ qtb2ffiffiffi.ffi 1

qffiffiffiffi ⁎ The profit maximizing solution gives p* ¼ r
b 2
q and

2

So, p* ¼ 2r þ f * ¼ 2r þ tb2 Additionally, x* ¼ ft ¼ b2t1

1
⁎
xm ¼ qtð2
qÞ.
qr
2b2
qffiffiffiffi
r
p⁎
and d* ¼ ¼ 2tr
b1
. Hence the market coverage is P* ¼ 2
a tq4
2a2 tq3
2rb2 qþr2 qþ2b22
t qffiffiffiffi
2t qffiffiffiffi Total 2tqð2
qÞ . We additionally have
k* ¼ 2x þ 2d ¼ 2ð x þ d Þ ¼ 2 b1
þ r

2t ¼ t .
b1 r
the following: d* ¼ r
qrþb 2
2t 2t t ð2
qÞ .
The market coverage is then
Total profit becomes P* ¼ r
a
b : equal to k* ¼ 2d* þ 2qx⁎m ¼ 2tððr
b2Þ
2
Total 2t 1 1 2
qÞ .

A.2. Internet changing value coupons with free perfect References

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dPTotal 2r
2p*
¼0¼ : people and technology, 2005 http://www.torontoadr.com/labour.shtml.
dp t [3] R. Alsop, Companies seek ways to put coupons where they will
2
PTotal count, Wall Street Journal 25 (1985) (August 8).
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Hsing Kenneth Cheng received the Ph.D.
degree in computers and information systems
from William E. Simon Graduate School of
Business Administration, University of Roche-
ster in 1992. He is Associate Professor of
Information Systems and the American Eco-
nomic Institutions Faculty Fellow at the
Department of Information Systems and Op-
erations Management of Warrington College of
Business Administration, The University of
Florida. Prior to joining UF, he served on the
faculty at The College of William and Mary from 1992 to 1998. His
research interests focus on modeling the impact of Internet technology on
software development and marketing, and information systems policy
issues. His work has appeared in Computers and Education, Computers
and Operations Research, Decision Support Systems, European Journal
of Operational Research, IEICE Transactions, IEEE Transactions on
Engineering Management, Information Technology and Management,
International Journal of Electronic Commerce, International Journal
of Web Services Research, Journal of Business Ethics, Journal of
Information Systems and e-Business Management, Journal of Manage-
ment Information Systems, and Socio-Economic Planning Sciences. Dr.
Cheng has co-edited several special issues in various information
systems journals. He has served on the program committee of many
information systems conferences and workshops, and is a program co-
chair for the Workshop on E-Business (2003).
Kutsal Dogan is an Assistant Professor at the
Information Systems and Operations Manage-
ment department, University of Texas at
Dallas. He holds a Ph.D. degree in decision
and information sciences from University of
Florida. Dr. Dogan's research interests are
diverse and lie broadly in marketing, econom-
ics and information systems. Specifically, he
is interested in the analysis and development
of pricing and promotion models; particularly
those apply to Internet businesses. His
research tries to quantify the effects of promotions, dynamic pricing
and second-degree price discrimination tools on consumers and
competition. He is also interested in the development, planning and
pricing issues for information products and services such as software.
Dr. Dogan serves on the editorial boards of Decision Sciences Journal
and International Journal of E-business Research. He is a member of
Institute for Operations Research and Management Science (IN-
FORMS), Association for Information Systems (AIS) and Decision
Sciences Institute (DSI).