A Joint Optimal Model of Pricing, Rebate Value, and Redemption Hassle

Abstract

Although rebates are widely employed, redemption is not effort free, and the hassle of redemption is an important decision variable for buyers. The current research examines the impact of hassle cost on optimal rebate strategy. An analytical model is developed that simultaneously determines the supply chain's optimal price, level of rebate value, and rebate‐redemption hassle, while allowing for slippage (as consumers may forget to redeem a rebate), in both a centralized and decentralized supply chain. Results show that the level of rebate‐redemption hassle plays a key role in segmenting the market into rebate and nonrebate purchasers. Although in a centralized supply chain redemption hassle should increase in a convex manner with valuations, no such restrictions exist in a decentralized supply chain. This difference is due to double marginalization, which results in higher retail prices in the decentralized supply chain. Rebates can be used to reduce this double marginalization. Furthermore, a manufacturer in a decentralized supply should offer a more attractive rebate than in a centralized supply chain. We also find that changes in the supply chain's optimal price and rebate strategy are nonlinear and nonmonotonic in both production cost and elasticity for consumers’ disutility for hassle. Finally, findings are all supported by results from numerical analyses. Overall, our work contributes theoretically and managerially to the study of rebates by jointly considering price, rebate value, and redemption hassle.

Research on Platform Operation Strategy Considering Consumers’ Hassle Costs

“…Fogel and Thornton found that too much hassle discourages consumers from using rebates, while too little hassle induces all customers to use rebates [27]. Popkowski et al examined the effect of hassle costs on optimal rebate strategies and showed that the hassle of rebates level plays a key role in dividing the market into rebate and non-rebate purchasers [44].…”

Understanding the Value of Delayed Discounts in Retail Rewards Programs

“…Analogously, we find that delayed discounts can increase profits, but in a different setting—we require neither inconvenience costs nor postpurchase changes to utility, and we permit repeat purchasing. In a recent paper, Zhang, Popkowski Leszczyc, Qu, and Joseph (2019) relate redemption costs to rebates' profitability in centralized and decentralized supply‐chain settings, and show that decentralization leads to larger optimal rebates. Based on an empirical study, Zhang, Krishna, and Dhar (2000) present evidence that up‐front discounts tend to increase sales, yet “from a profitability perspective, rear‐loaded promotions may be better than front‐loaded promotions.” Our analytical results agree with their empirical finding, given that postsale credit is a form of rear‐loaded promotion.…”