Discussion Paper

No. 2018-76 | October 16, 2018
Gift cards or vouchers as a collusive device

Abstract

In this paper, the authors provide a rationale for why firms issue gift cards or vouchers. Mainly, issuing gift cards can be considered as a collusion-facilitating practice. A firm that issues gift cards can raise its price for several reasons. First, the discounted price by the face value of the gift card makes demands less elastic so that the resulting price will be higher. Second, it has the lock-in effect which makes price competition even less severe. Third, once a firm has sold its gift cards, selling a product to card holders does not increase its revenue, but only increases its cost. So the firm has an incentive to raise the price. Interestingly, the authors argue that the lock-in effect is not essential to the collusion-facilitating effect of gift cards in the sense that collusive prices can be sustained even when the two firms mutually honor their own gift cards, so that no lock-in effect exists. This is mainly because firms can still raise prices for the total proportions of consumers who face less elastic demands due to discounted prices. Despite the apparent additional cost of issuing gift cards, firms can benefit from issuing them if its collusive effect is higher than the increase in the cost.

JEL Classification:

D43

Assessment

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Links

Cite As

Jeong-Yoo Kim and Jihoon Park (2018). Gift cards or vouchers as a collusive device. Economics Discussion Papers, No 2018-76, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-76


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