With the advent of panel data on household purchase behavior, and the development of statistical procedures to utilize this data, firms can now target coupons to selected households with increasing accuracy and cost effectiveness. As a consequence, new avenues of competition have opened up in which firms play an active role in market segmentation. In this article, we develop an analytical framework to examine the effect of targeting on firm profits, prices, coupon face values, and redemption rates. We also determine firms' optimal mix of offensive and defensive couponing. Among our findings: when rival firms can target their coupon promotions at brand switchers, the outcome will be a prisoner's dilemma in which the net effect of targeting is simply the cost of distribution plus the discount given to redeemers.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100959/1/ECON403.pd
