The effects of customer rebates and retailer incentives on a manufacturer's profits and sales

In some industries such as automotive, production costs are largely fixed and therefore maximizing revenue is the main objective. Manufacturers use promotions directed to the end customers and/or retailers in their distribution channels to increase sales and market share. We study a game theoretical model to examine the impact of “retailer incentive” and “customer rebate” promotions on the manufacturer's pricing and the retailer's ordering/sales decisions. The main tradeoff is that customer rebates are given to every customer, while the use of retailer incentives is controlled by the retailer. We consider several models with different demand characteristics and information asymmetry between the manufacturer and a price discriminating retailer, and we determine which promotion would benefit the manufacturer under which market conditions. When demand is deterministic, we find that retailer incentives increase the manufacturer's profits (and sales) while customer rebates do not unless they lead to market expansion. When the uncertainty in demand (“market potential”) is high, a customer rebate can be more profitable than the retailer incentive for the manufacturer. With numerical examples, we provide additional insights on the profit gains by the right choice of promotion.© 2009 Wiley Periodicals, Inc. Naval Research Logistics, 2010

[1]  Robert C. Blattberg,et al.  How Promotions Work , 1995 .

[2]  Preyas S. Desai,et al.  The Better They are, the more They Give: Trade Promotions of Consumer Durables , 2005 .

[3]  David Goldsman,et al.  Overlapping variance estimators for simulations , 2004, Proceedings of the 2004 Winter Simulation Conference, 2004..

[4]  Daniel F. Spulber.  Non-cooperative equilibrium with price discriminating firms☆ , 1979 .

[5]  Uday S. Karmarkar,et al.  Competition and Structure in Serial Supply Chains with Deterministic Demand , 2001, Manag. Sci..

[6]  Michael C. Walker,et al.  First Degree Price Discrimination and Profit Maximization , 1973 .

[7]  Kusum L. Ailawadi,et al.  Findings - Retailer Promotion Pass-Through: A Measure, Its Magnitude, and Its Determinants , 2009, Mark. Sci..

[8]  Dominique M. Hanssens,et al.  New Products, Sales Promotions, and Firm Value: The Case of the Automobile Industry , 2004 .

[9]  Preyas S. Desai,et al.  Enabling the Willing: Consumer Rebates for Durable Goods , 2006 .

[10]  Roman Kapuscinski,et al.  Coordinating Contracts for Decentralized Supply Chains with Retailer Promotional Effort , 2004, Manag. Sci..

[11]  Kannan Srinivasan,et al.  Managing Capacity Through Reward Programs , 2004, Manag. Sci..

[12]  Pinar Keskinocak,et al.  Dynamic pricing in the presence of inventory considerations: research overview, current practices, and future directions , 2003, IEEE Engineering Management Review.

[13]  Chung-lun Li,et al.  The impact of manufacturer rebates on supply chain profits , 2007 .

[14]  C. Narasimhan.  A Price Discrimination Theory of Coupons , 1984 .

[15]  Sunil Chopra,et al.  Threshold Incentives and Sales Variance , 2011 .

[16]  Florian Zettelmeyer,et al.  How the Internet Lowers Prices: Evidence from Matched Survey and Automobile Transaction Data , 2006 .

[17]  S. C. Choi,et al.  Price Competition in a Channel Structure with a Common Retailer , 1991 .

[18]  J. Little,et al.  A Theory of Forward Buying, Merchandising, and Trade Deals , 1996 .

[19]  Florian Zettelmeyer,et al.  $1,000 Cash Back: The Pass-Through of Auto Manufacturer Promotions , 2006 .

[20]  Eitan Gerstner,et al.  Profitable Pricing When Market Segments Overlap , 1986 .

[21]  James D. Hess,et al.  Pull Promotions and Channel Coordination , 1995 .

[22]  Richard Staelin,et al.  Manufacturer Allowances and Retailer Pass-Through Rates in a Competitive Environment , 1999 .

[23]  Gérard P. Cachon,et al.  Capacity Allocation Using Past Sales: When to Turn-And-Earn , 1999 .

[24]  James D. Hess,et al.  A Theory of Channel Price Promotions , 1991 .

[25]  Pinar Keskinocak,et al.  Dynamic procurement in a capacitated supply chain facing uncertain demand , 2008 .

[26]  Ruqu Wang.  Bargaining versus posted-price selling , 1995 .

[27]  P. Goldberg.  Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey , 1996, Journal of Political Economy.

[28]  Evan L. Porteus,et al.  Manufacturer-to-Retailer Versus Manufacturer-to-Consumer Rebates in a Supply Chain , 2008 .

[29]  A. Muriel,et al.  Impact of Price Postponement on Capacity and Flexibility Investment Decisions , 2006 .

[30]  Florian Zettelmeyer,et al.  Inventory Fluctuations and Price Discrimination: The Determinants of Price Variation in Car Retailing , 2005 .

[31]  D. Simchi-Levi,et al.  Dynamic Pricing and the Direct-to-Customer Model in the Automotive Industry , 2005, Electron. Commer. Res..

[32]  R. Gibbons.  Game theory for applied economists , 1992 .