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

Abstract

Abstract: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.

The pricing of product and value-added service under information asymmetry: a product life cycle perspective

“…Mukhopadhyay, Zhu, and Yue 2008). Other scholars have extended the study to pricing problems under multiple conditions, such as manufacturers' incentives (Demirag, Baysar, and Keskinocak 2010), dual channels (Liu, Zhang, and Xiao 2010;Yan and Pei 2011) and multiple decision-makers (Wei, Zhao, and Li 2013).…”

Retail Supply Chain Management

“…In a set of recent papers, Demirag and colleagues also compare two avenues available to manufacturers: offering rebates to consumers or offering incentives to retailers. Demirag et al (2010) compare manufacturer-to-consumer rebates with manufacturer-to-retailer incentives, which take the form of a lump sum payment (in contrast to the manufacturer-to-retailer rebate in our model, which is a per-unit payment). The retailer uses this incentive to offer discounts to select customers, thus effectively achieving price discrimination among customers.…”

Optimizing channel profits with threshold incentives and alternative pricing schemes

“…In our research, we model the threshold incentives and the retailer's price discrimination with motivations from the auto industry. Bruce et al (2005), Caliskan Demirag et al (2010), and Sohoni et al (2010a, b) are other relevant studies that analyze incentives in the auto industry. Sohoni et al (2010a, b) study threshold incentives in the form of stair-step functions of per-unit payments and bonus payments.…”

“…Caliskan Demirag et al (2010) compare retailer incentives and customer rebates, which are two common promotions in the auto industry. The authors model the retailer's price discrimination and analyze lump-sum/per-unit retailer incentives, but they do not consider the threshold-based structure.…”