Do Firms Use Coupons and In-store Discounts to Strategically Market Experience Goods Over the Consumption Life-Cycle? The Case of Cigarettes

Andrew Sfekas, Dean R. Lillard

NBER Working Paper No. 19310
Issued in August 2013
NBER Program(s):Health Economics, Industrial Organization

Cigarettes are experience goods - most of their utility value only gets revealed when one consumes them. We hypothesize a three phase consumer life cycle for experience goods. Consumers initially do not know their utility from the good or their preferences for particular characteristics, and may initially choose the most familiar brand. In the second phase, they are informed about the good and may experiment with different brands. In the third phase, they may become loyal to one brand or exit the market. Firms could target price discounts for each phase, either to encourage experimentation (pay-to-switch), to retain customers (pay-to-stay), or to price-discriminate. We use market-level data on price, sales, in-store discounts, and coupon offers of 15 brands from 1995 to 2007 and individual-level data on brand choices from 1995 to 2004 to explore whether firms discount cigarettes in ways consistent with a life-cycle consumption model. We find that the three highest-selling brands primarily discount as price discrimination and pay-to-stay strategies, while smaller, specialty brands discount to encourage smokers to switch brands.

download in pdf format
   (355 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19310

Users who downloaded this paper also downloaded* these:
Chaloupka and Warner w7047 The Economics of Smoking
Evans and Harrigan w10250 Tight Clothing: How the MFA Affects Asian Apparel Exports
Sinaiko, Afendulis, and Frank w19639 Enrollment in Medicare Advantage Plans in Miami-Dade County: Evidence of Status Quo Bias?
Miller and Mobarak w18964 Gender Differences in Preferences, Intra-Household Externalities, and Low Demand for Improved Cookstoves
Meredith, Robinson, Walker, and Wydick w19312 Keeping the Doctor Away: Experimental Evidence on Investment in Preventative Health Products
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us