How coupon clippers help the rest of us pay less for our cereal.Consumer behavior ; Coupons (Retail trade)

Jiaying Huang

English

Research Papers in Economics

illustration by geoffrey grahn, photograph by kathleen dooher Regional Review Q1 2003 1
Fill ’er up
run your vehicleon vegeta-
bles! Biodiesel fuel—processed
veggie oil that can be used to run
diesel trucks, buses, and cars—
sounds like the perfect remedy for
our current reliance on pollutant-
potent diesel fuel. Biodiesel cuts
emissions up to 45 percent, low-
ers our reliance on foreign oil, re-
quires no new equipment pur-
chases, and is safe enough to drink. Sound too
good to be true? Maybe it is—biodiesel can
cost up to 50 cents more per gallon than reg-
ular diesel, it underperforms in cold weather,
and it actually emits more nitrogen oxide, the
main ingredient in smog. 
Add biodiesel to the dizzying list of alter-
native fuels being experimented with nation-
wide as Americans seek to mitigate the im-
pacts of diesel fuel. Accounting for a mere 5
percent of driven miles, diesel-powered ve-
hicles are responsible for one-third of the na-
tion’s nitrogen oxide emissions and one-half
of urban particulate matter, the soot linked by
the Environmental Protection Agency to
15,000 premature deaths each year. Despite
the plethora of fuel alternatives, not one has
emerged as the ultimate solution to our woes.
Compressed natural gas, embraced for its low
soot and smog output and historically cheap-
er than diesel, requires buying new vehicles,
building new maintenance facilities, and in-
stalling expensive high-pressure fueling sta-
tions. Ultra-low sulfur diesel, which can be
readily used with existing infrastructure and
cuts particulate matter emissions up to 95 per-
cent, is pricey, and special particulate traps—
at $5,000 to $8,000 a pop—must be installed
on vehicles to fully capture the environmen-
tal benefits. Electric vehicles require time to
recharge. Hybrids do not meet federal stan-
dards for alternative fuel credits. Methanol has
abysmal fuel efficiency. 
Given this array of substandard options,
New England fleet managers are grappling to
find the best solution. In Norwalk, Con-
necticut, experiments with both natural gas
and biodiesel yielded high costs, prompting
officials to invest in ultra-low sulfur diesel and
a new fleet of buses outfitted with particulate
traps. UMass Amherst’s Fleet Services, seek-
ing to save up to $20,000 per year through
federal clean fuel incentives, opted for
biodiesel because of the lack of nearby natur-
al gas or ethanol fueling facilities. The Mas-
sachusetts Bay Transportation Authority ini-
tially chose compressed natural gas buses to
clean up air quality around Boston, but cost-
ly delays in building new natural gas facilities
have compelled them to supplement with new
ultra-low sulfur diesel vehicles.
With no clear winner in the alternative fu-
els game, transit fleets are relying on trial and
error to find the best balance of cost and ef-
fectiveness. But they remain hopeful that one
day reducing the impact of diesel fuel will not
mean wrestling with imperfect options.
—Mary C. Fitzgerald 
observations
Easy money?
Coupons are a bargain for people
who take the time to clip them, but
everyone else pays a higher price,
right? Wrong—at least for breakfast
cereals. Shelf prices on cereals are
actually lower when coupons are
offered, according to recent
research by Aviv Nevo and
Catherine Wolfram at the University
of California at Berkeley. Like the
market for many products, the
cereal market is dominated by a
few large producers. So if Post
offers a coupon on Raisin Bran,
Kellogg’s often reacts by lowering
its shelf price or offering a coupon,
(continued on next page)
A biodiesel-fueled truck
transports coal to make
energy for the UMass
Amherst campus. 2 Regional Review Q1 2003
Observations
continued from previous page
too. This may force Post to cut its shelf price
to compete; then all consumers pay less.
Yet despite the threat of these price
wars, manufacturers still distributed about
300 billion coupons in 2001. Why? Because
coupons are one of the most effective ways
of introducing new products and increasing
market share. Discounts can entice price-
sensitive and non-brand-conscious cus-
tomers to try a new product, and some of
those who try it will then continue to pur-
chase it even without the price break. Plus
the mere existence of a coupon alerts con-
sumers about the product, which may lead
them to buy the product in the future. Best
of all, coupons are cost-effective. A recent
study by Promotion Decisions showed that
coupons generate almost as much sales
volume as discounts direct to retailers, at
half the cost.
But manufacturers would prefer to reap
the benefits of coupons while avoiding their
price war side effect. To this end, some
have started putting their coupons on com-
plementary products; for example, a cereal
company might put one on a milk carton.
Unlike traditional coupons in Sunday news-
papers, these cross-coupons are not pub-
licly published, making them difficult for
competitors to detect and therefore lessen-
ing the chance of price slashing. Other
manufacturers use information from cus-
tomer purchases to generate instant
coupons at the cash register for competing
products (if a customer buys Dannon
yogurt, they might get a coupon for
Colombo)—also hard for competitors to
track. And companies are using Internet
and paperless coupons to reduce distribu-
tion costs and better target their customers.
It looks like the days of unintended dis-
counts for nonclippers may be numbered. 
—Jiaying Huang
SPENDING CUTS mean making 
difficult tradeoffs; every line 
item matters to someone.
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Observations: easy money?

http://www.bostonfed.org/economic/nerr/rr2003/q1/observations.pdf

Observations: easy money?

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