The Chase Freedom credit card has a promotion that gives users bonus cash back.
Here’s how it works:
– For a given quarter, you earn 5% on purchases in specific categories (such as at grocery stores and at movie theaters). You can earn this bonus rate of 5% on up to $1500 worth of purchases.
– For all other purchases, you earn 1%.
Let’s think about why a consumer would participate in something like this, and if it’s the rational economic choice. As a consumer, one would be reasonable to think: “Well, I already spend on these categories, so I might as well sign-up and earn the extra bonus cash back along the way. I’ve got nothing to lose.” So on the surface, the choice seems trivial. But on a deeper level, I think that’s where consumers end up not making the rational economic choice.
Assuming a consumer goes on to spend exactly $1500 in the quarter for the bonus categories, they will have thus earned $75 bonus cash back (5% of $1500). The essential question would be: which is more likely?
(a) Irrespective of this bonus offer, the consumer would have spent at least $1425 on these categories for the quarter.
(b) This incentive impacted multiple purchase decisions and caused the consumer to make multiple purchases as a result of the existence of the incentive whereas they would not have made the purchase otherwise. Specifically, without this incentive, they would have spent less than $1425 for the bonus categories.
For most consumers, I think (b) is more likely than (a). In other words, they would be best served carving out $75 (or more) of the $1500 and simply not spending that money in the first place, rather than making the spend and getting the money back.