Rebates Offered by a Multiproduct Firm

Rebates have long been recognized as a price discrimination mechanism. When firms offer an extensive product line, an important managerial question concerns the choice of which products to promote. This paper finds that a multiproduct firm leverages rebates to screen consumers on the basis of their redemption costs, which enables it to exercise price discrimination via the product line more effectively. In particular, because consumers who use rebates tend to have lower valuations, the classic cannibalization concern is less severe in the product line offered to rebate users. Therefore, the lowest-quality product that is promoted with a rebate is of higher quality than the lowest-quality product that is offered without rebate. Hence, the firm does not promote its lowest-quality products. Instead, by promoting some products with rebates, the firm drives some low-valuation consumers to trade up to higher-quality products. Notably, it is found that, contrary to the commonly held view, rebates can serve a price discrimination role even when redeemed by all consumers. Therefore, this paper proposes a novel price discrimination explanation for large rebates, sometimes in the order of several hundreds of dollars, that are frequently used in industries such as consumer electronics and household appliances.