Increasing Retailer Loyalty Through the Use of Cash Back Rebate Sites

Cash back sites are referral intermediaries that help retailers attract consumers and serve consumers through rebate offers. What exactly is the strategic impact of cash back sites on retailer pricing? We examine this by analyzing two competing retailers that use a cash back site to serve consumers, some of whom are loyal, some of whom are switchers, and some of whom are searchers. We formulate a multistage game by innovating on extant models of consumer price search and solve for the subgame perfect Nash equilibrium prices. We find that the cash back site can allow retailers to profitably eliminate consumer search and that makes retailer sites more sticky. Thus, cash back sites can act as strategic partners of retailers. Surprisingly, even consumers that use the cash back site can be worse off in the presence of cash back sites under some conditions. In particular, if search prevention is profitable even without a cash back site, then cash back sites result in higher prices to consumers. We also offer practical guidance through our finding that the optimal discount offer should be proportional to price rather than a flat sum.