Rebates, Inventories, and Intertemporal Price Discrimination

We demonstrate that universally redeemed rebates can increase manufacturer profits by reducing the incentives of downstream retailers to hoard inventories when optimal wholesale prices vary predictably over time. By bypassing retailers and making direct contracts with buyers, the manufacturer can increase the variations in effective prices paid by consumers without concomitantly creating larger incentives for retailers to hold inventories. During profitable, high-demand periods, manufacturer revenues are ordinarily constrained by "competition" from retailer inventories, thus limiting profits. However, by selectively offering rebates to consumers while maintaining high wholesale prices, low-demand periods can be accommodated without inducing retailer hoarding. Copyright 2000 by Oxford University Press.