Optimizing gift card and pricing strategies in the presence of double mental discounting

Gift card promotions are widely used in the retail industry and often lead to a phenomenon known as double mental discounting, where consumers mentally deduct the gift card value from their purchase costs multiple times—both when they receive and redeem the card. This paper develops an analytical model to examine the impact of double mental discounting on retailers' promotion and pricing decisions within a two-period framework. The results indicate that retailers' decisions to implement gift card strategies depend on both the double mental discounting and the cash equivalent effects. When offering gift card promotions, retailers generally provide high-value gift cards and raise prices to stimulate consumer purchases while preserving revenue. The double mental discounting effect positively influences gift card value but may negatively impact prices. Additionally, when consumers exhibit inconsistency in their perceived value of gift cards, retailers are even more inclined to offer gift card promotions. Furthermore, we extend the basic model to incorporate consumer heterogeneity in cash equivalent effects, retailer sales costs and competition. This study provides valuable managerial insights for retailers, particularly in identifying when and how to deploy gift card promotions in the presence of double mental discounting.