The Effect of Delayed Incentives on Supply Chain Profits and Consumer Surplus

Abstract

We examine the use of consumer cash mail‐in rebates offered by a manufacturer in a Stackelberg game where the manufacturer is the leader and the retailer is the follower. Our analysis indicates that rebates are profitable for manufacturers if consumers are inconsistent in the sense that their rebate valuation when they make purchase decisions is independent of their redemption probabilities when they make redemption decisions. If the manufacturer keeps the wholesale price unchanged, then the rebate increases the retailer's profit by a larger amount than the increase in the manufacturer's profit. If the manufacturer jointly optimizes the wholesale price and rebate, then the increase in the manufacturer's profit is twice the increase in the retailer's profit. The retailer responds to rebates by increasing the retail price, which increases the margin paid by consumers who do not redeem the rebate. On average, consumer surplus decreases when it is optimal for manufacturers to offer rebates. We suggest incentive schemes that make it worthwhile for retailers to limit the price increase. In these incentive schemes, the manufacturer imposes a negative relationship between the rebate value and the retail price. We show that such incentives increase supply chain profits.

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

“…() showed that due to slippage, manufacturer rebates can always enhance the manufacturer's profit. Along similar lines, Khouja and Zhou () found that rebates are only profitable if consumers are inconsistent in their decision to purchase and their decision to redeem. Therefore, incorporating both hassle cost and slippage in our model is important.…”

Coordinating contracts for supply chains that market with mail-in rebates and retailer promotions

“…Nalla et al (2008) design a combined rebate mechanism (a retailer-sponsored rebate together with a manufacturer-sponsored wholesale price rebate) to coordinate the supply chain. Khouja and Zhou (2010) show that an incentive contract in which the manufacturer's rebate value is negatively linked with the retailer's price can improve the performance of a decentralized supply chain. Saha (2013) studies several different rebated-induced contracts under a deterministic demand setting, and for simplicity the model assumes no slippage behaviour.…”

Retail Supply Chain Management

“…For instance, Yang et al (2010) study how manufacturer-suggested retail prices (MSRP) interact with rebates. In a similar vein, Khouja and Zhou (2010) study a supply chain where the manufacturer implements incentives that curb the retail price. They use a model where consumers are heterogeneous in the value they derive from a rebate.…”