This is a voucher you get at the (often automated) cashier after you have paid. It tells you that some of the products you just purchased would have been cheaper at a competitor grocery chain. Because Tesco is very generous and cares about you, they give you back the difference - as a voucher. You can redeem it at your next trip to Tesco. The only catch is that you can redeem it only starting tomorrow and not further than one month from now.
When the automated cashier coughed up one of those for the first time, I couldn't help but feel ripped off. I can't help but think: If you really care about me, the customer, then just give me the money right now! No, these vouchers are designed to shrewdly extract surplus from consumers on a very large scale.
I'm not a microeconomist, so I'm struggling to put adequate structure on this. Here's what I think these vouchers do.
First of all, this is a situation in which Tesco does lower its price on its products, but at the same time borrows money from me by issuing an IOU that doesn't pay interest. Is this a large cost? Suppose first that we lived in a world in which such IOUs could be freely traded without frictions. So even if I didn't want to go to Tesco tomorrow, I could simply trade my voucher with my neighbour for cash. This way, I would only effectively have lent money to Tesco for one day. Not a big deal for me as a consumer. But still a potentially big deal for Tesco. Assuming that every voucher was redeemed the next day, and that the average voucher is only 1% of the total purchase, this still means that Tesco is perpetually borrowing 1% of one day's revenue at zero interest. Not bad considering that retail profit margins are very low. It could be a noticeable effect on Tesco's cash flow figure in the quarter that they introduce the vouchers.
But we have assumed that the vouchers can be freely traded. In practice, I rarely redeem the vouchers the next day, and it has happened that I just forgot to bring them to the store so many times that they eventually expired. I have a feeling that I'm not alone with that experience. If on average customers take one week to redeem their voucher and 10% forget to do so, then Tesco is now perpetually borrowing 7% of one day's revenue at an interest rate of minus ten percent. That's not bad at all.
Then there's more to these vouchers: They effectively lock customers in to a particular grocery chain. Since I have the voucher, I have to go to Tesco again next time I buy groceries, or else I lose the money! This effect is particularly strong for people who buy their groceries infrequently. Not so much the case for the student in central London but probably more so for families with children living in less urban parts of England. Incidentally, these might be the type of customers with more price elastic demand. So what this effectively does is to reduce the price elasticity of Tesco's demand curve. It also reduces the price elasticity of the demand its competitors are facing, since there are fewer people switching chains in general (and particularly so if they also introduce vouchers). So I would not be surprised if this system sometimes raised the lowest price paid for a particular product instead of lowering it.
Finally, there's also an information story here. Tesco operates a sophisticated system that compares the prices of all of its products to its competitors to calculate the size of each voucher (you can read up on all this here). But they don't print that information on the voucher! It just says that your purchase would have been cheaper at a competitor, but not which competitor, or which were the expensive products. You can in principle find out by going on their website and punching in the serial number of your voucher, but seriously - who does that? Moreover, when one product is two pounds more expensive and the other two pounds cheaper, you get no voucher and the website is of no help either. Clearly, they find it advantageous not to tell you the specific price differences of their products upfront. Otherwise, you might just run to their competitor! Instead, you are just supposed to feel that warm glow that Tesco cares for you. This works because consumers face significant costs of information acquisition, and you can bet they will try to keep it this way.
Now you might say: Fabian, those vouchers as a matter of fact make stuff cheaper for you than before. So stop complaining already! I get that. Their competitors are not nearly as close to where I live, they have market power and are going to use it. So it's nice to see stuff is getting cheaper. But it is just so obvious that they are not competing as hard as they could. And even in lowering prices, they introduce no-trivial contracts for very simple transactions, serving no other purpose than to reduce the intensity of competition. That just reminds me of how far we are away from efficient markets.
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UPDATE: After posting this, I was told the following clever example. In a game in which every store has a price match guarantee, customers have no incentive at all to switch to competitors. This means that an equilibrium where all stores charge the monopoly price is sustainable even as a non-cooperative Nash equilibrium. No store will find it profitable to lower their price from the monopoly price because they know competitors automatically lower their prices, and all competitive pressure is removed. So it is indeed possible that the vouchers make us worse off than before.
