Why do manufacturers issue coupons? An empirical analysis of breakfast cereals

We explore the relationship between shelf prices and manufacturers' coupons for 25 ready-to-eat breakfast cereals. We find that shelf prices are lower during periods when coupons are available. This result is inconsistent with static monopoly price discrimination undera broad range of assumptions. We present evidence that is inconsistent with both dynamic theories of price discrimination and explanations of couponing based on the vertical relationship between manufacturers and retailers. We find support for models of price discrimination in oligopoly settings as well as suggestions that firmwide incentives may induce managers to use coupons and price cuts simultaneously. Finally, lagged coupons have a positive effect on current sales, suggesting that coupons are used to induse repurchase.