The Strategic Role of Exchange Promotions

Abstract

An exchange promotion allows consumers to turn in an old good and receive a discount toward the purchase of a new product. The old good that is turned in can either be within the same category as the new good or it may be in a different category. For example, one can turn in an old CD player to count toward a new CD player (a within-category exchange or traditional trade-in) or toward a new television (a cross-category exchange). This paper studies both within-category and multicategory exchange promotions and analyzes their similarities and differences. In a competitive setting with two firms, we model exchange promotions and establish the equilibrium outcomes. We find that categories in which consumers have a high level of waste aversion are more likely to have multicategory exchange promotions rather than within-category or no promotions. Multicategory exchange promotions can increase both consumers’ replacement purchases and their new purchases. Interestingly, we also find that strategic considerations can lead to a prisoner’s dilemma outcome in which neither firm offers any kind of exchange promotion. However, waste aversion and multicategory exchange promotions can give firms stronger incentives to get out of the prisoner’s dilemma outcome.

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