Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, April 8, 2019

Gift cards or vouchers as a collusive device

By: Kim, Jeong-yooPark, Jihoon
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.
Keywords: Gift card,gift voucher,collusion-facilitating practice,lock-in effect,elasticity effect,cost-saving effect
JEL: D43
Date: 2018
URL: http://d.repec.org/n?u=RePEc:zbw:ifwedp:201876&r=com

https://lawprofessors.typepad.com/antitrustprof_blog/2019/04/gift-cards-or-vouchers-as-a-collusive-device.html

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Comments

Hello!

Please note that this article was removed by its authors from the e-journal where it was posted in the first place: http://www.economics-ejournal.org/economics/discussionpapers/2018-76

Best,
Nathaniel

Posted by: Nathaniel | Apr 9, 2019 3:22:50 AM

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