Affiliate or not? A new price discrimination strategy on the cashback platform

This paper examines the impact of "cashback" mechanism on merchants' marketing strategy. Through reimbursing a portion of the transacted amount to consumers in a form of cashback, merchants are able to exercise second-degree price discrimination on unique cashback platforms. We develop an analytical framework which endogenizes consumers' preference over brands into utility formation. We derive the market equilibrium and find the optimal profit-sharing scheme under different market configurations. Our finding provides guidance to practitioners on optimal consumer segmentation strategy and cashback percentages. Managerial implications of brand valuation are also discussed.