Manufacturer-To-Retailer versus Manufacturer-To-Consumer Rebates in a Supply Chain

Starting with a newsvendor model (single-product, single-period, stochastic demand), we build a single-retailer, single-manufacturer supply chain with endogenous manufacturer rebates and retail pricing. The demand uncertainty is multiplicative, and the expected demand depends on the effective (retail) price of the product. A retailer rebate goes from the manufacturer to the retailer for each unit it sells. A consumer rebate goes from the manufacturer to the consumers for each unit they buy. Each consumer’s response to consumer rebates is characterized by two exogenous parameters: α, the effective fraction of the consumer rebate that the consumer values, leading to the lower effective retail price perceived by the consumer, and β, the probability that a consumer rebate will be redeemed. The type(s) of rebate(s) allowed and the unit wholesale price are given exogenously. Simultaneously, the manufacturer sets the size of the rebate(s) and the retailer sets the retail price. The retailer then decides how many units of the product to stock and the manufacturer delivers that amount by the beginning of the selling season. Compared to no rebates, an equilibrium retailer rebate leads to a lower effective price (hence, higher sales volume) and higher profits for both the supply chain and the retailer. An equilibrium consumer rebate also leads to a lower effective price and higher profits for the retailer, but not necessarily for the chain. Under our assumptions, such a consumer rebate (with or without a retailer rebate) allocates a fixed fraction of the (expected) supply chain profits to each player: The retailer gets $$\alpha/(\alpha+\beta)$$ and the manufacturer gets the rest, leading to interesting consequences. However, both firms prefer that α be higher and β lower: Even though the manufacturer gets a smaller share of the chain profits, the total amount received is higher. Neither the retailer nor the manufacturer always prefers one particular kind of rebate to the other. In addition, contrary to popular belief, it is possible for both firms to prefer consumer rebates even when all such rebates are redeemed.