11.08.2021

Cash Back

夏耀祥 | SHANG, Weixin | WANG, Yunjie

Rebate, or money that is returned to the consumer after they have paid for goods or services, is a popular form of sales promotion, with studies showing that 50% of retailers and 48% of manufacturers use rebates as part of their customer loyalty programmes. For example, USD8 billion worth of rebates were issued in the U.S. in 2010. Companies make use of rebates for a number of reasons, such as demand expansion, price discrimination across different consumer segments, or moving inventory, and because retailers can benefit from a higher demand due to manufacturers’ rebate programmes, they have an incentive to subsidize these programmes.

With this in mind, it is common for competing manufacturers to have different strategies in regards to their rebate programmes when selling through a common retailer. It is also common for a retailer to selectively subsidize only some of the competing manufacturers selling through its channel. Since the existing theory does not explain these phenomena, a recent study by Albert Y. Ha, Weixin Shang, and Yunjie Wang asked: What is the incentive for manufacturers to offer rebate when they sell substitutable products through a common retailer? How should a retailer subsidize these manufacturers to offer rebate?

To go about filling this knowledge gap, the authors consider manufacturer rebate competition in a supply chain with two competing manufacturers selling substitutable products through a common retailer. They also identify competition intensity, fixed cost of a rebate programme, market size, redemption rate of rebate, and the proportion of rebate-sensitive consumers in the market as the key performance drivers, and characterize how they affect firm decisions and profits.

The study reveals that more intense competition induces manufacturers to lower the rebate value or stop offering it entirely. In the case of the latter, “it hurts the retailer, benefits a non-rebate offering rival manufacturer, and benefits a rebate-offering rival manufacturer if competition is intense and hurts them otherwise”. Similarly, the authors find, a manufacturer could benefit when market size shrinks. Further, Ha, Shang, and Wang explain that “A rebate-offering manufacturer could benefit when either the redemption rate becomes higher or the proportion of rebate-sensitive consumers becomes smaller, and could be hurt when a rival manufacturer’s fixed cost becomes higher”. The findings also revealed that when the retailer subsidizes the manufacturers to offer rebate programmes, it always benefits the retailer but may benefit or hurt the manufacturers. When the retailer wants to encourage both manufacturers to offer rebate, they always prefer to subsidize the manufacturer with the higher fixed cost first. It turns out that sometimes the other manufacturer will then voluntarily offer rebate, even without subsidy.

Based on the above results, the study provides a number of interesting managerial insights. Specifically, with rebate competition, a manufacturer might be negatively impacted by a seemingly more favourable business environment if it encourages a rival manufacturer to start offering rebate. Moreover, a retailer should be careful about taking actions to increase competition between manufacturers because they might suffer if it results in rebate programmes being stopped. It is worth noting that although a retailer always benefits from more manufacturer rebate programmes, they may only need to subsidize some of the manufacturers, as the others will then voluntarily offer rebate.

Despite the novel and interestingly counterintuitive results, the authors point out that their model has a few limitations. First, they assume that the two manufacturers are only heterogenous in their fixed costs. Second, they assume full information and focus on the slippage effect of rebate (when a consumer is sensitive to rebate at the time of purchase but does not redeem afterwards). Third, sometimes manufacturers offer instant rebate instead of mail-in/online rebate. The authors agree that investigating these variables would be interesting for future studies.

夏耀祥

Senior Associate Dean, Wei Lun Foundation Professor of Business, Chair Professor
Information Systems, Business Statistics & Operations Management