According to N. Mankiw’s book «Principles of Macroeconomics» there are ten main principles of economics and one of them is that people do respond to incentives.An incentive is something that stimulates a person to act. The author believes that the role of incentives is so important to the study of economics that due to them it iseven hard to analyze how markets work. (Mankiw 7)
The stated situation is one of the fuel rewards saving programs. In economics this promotion strategy is known as «cross-market discounts». In our case grocery is a source market and fuel is a target market
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Juridically this cooperation is a simple contract between a supermarket and particular gasoline brand. It is mutually beneficial because in the majority situations consumer will spend more money than he planned in a particular supermarket chain and at the same time will come to a particular gasoline station to use the discount. So both supermarket and gas-station win by getting not only clients but loyal clients who will probably come back to enjoy the bonuses.
It is a worldwide common practice when supermarket giants encourage their costumers to spend more money on groceries in order to get fuel discounts. And what I have noticed is that this economics strategy works.
In my opinion using fuel rewards programs is quite rational decision for customers. This kind of incentive can be defined as positive because it benefits you with cross-related product.
First of all, an average person doesn't usually take care of whether he spends few dollars more or few dollars less on groceries at a single time. What is the reason not to buy something you will need tomorrow today in order to get bonuses?
Secondly, groceries and gas always stand together. The most convenient way to buy groceries is going to a supermarket by car. And in this way getting gas discount is a great deal for customers. Moreover the gas station from the gas-station - supermarket alliance is usually situated near the supermarket.
According to nowadays prices on fuel any rewarding program that will help you to reduce
Speaking about economics and trade, there is barely nothing that goes for free. It is a common fact thatall the discounts are paid from the customers wallet. By this discount a supermarket just gives a client an opportunity to pay product’s actual price instead of overpaying. And the customers who do not accept the terms of rewards saving programs appear to overpay. Rephrasing following, customers discounts are paid by other customers who ignore reward saving programs paying top price.
Cross-market discounts is a little bit different story. It basically depends on competitive intensity of source and target markets. When the competitive intensity is low the partnership in cross-market discounts will benefit at the cost of customers, when the competitive intensity is high both will notice that cross-market profits will reduce, and only when competitive intensity is medium the cross-market partners and the consumers will be benefited simultaneously. (Neslin 47)
That is why I find the idea to respond stated incentive in positive way rather rational.
Work Cited
Mankiw, N. Gregory. Principles of Microeconomics. 3rd ed. Mason, Ohio: Thomson/South-Western, 2004. 7. Print.
Neslin, Scott A. Sales Promotion. Cambridge, Mass.: Marketing Science Institute, 2002. 47. Print.
