1. In 2004, U.S. consumer products manufacturers distributed 27.548 billion coupons, with a face value of over $280 billion,of which a mere 1.2% were redeemedby consumers.
a) Suppose that the retail sectoris perfectly competitive. Comparethe competitive equilibrium in the retailmarket with (i) a wholesale price cut of 50 cents and (ii) widespread distribution of 50-cent coupons. For this part, you may assumethat all consumersuse coupons.
b) Would there be any difference between the wholesale price cut and using coupons if the retailer sector were a monopoly?
c) Explain how coupons may be used to discriminate among consumers on price.
d) Why do manufacturers spend millionsof dollars to distribute coupons when the redemption rate is so low? Why don’tthe manufacturers directly cut the the wholesaleprices of the products, which would be much cheaper to administer?