Managing Strategic Inventories via Manufacturer-to-Consumer Rebates

Manufacturer-to-consumer rebates are a staple of modern supply chains. Such rebates are typically viewed as a means of price discrimination because of partial redemption by consumers. However, the proliferation of universally redeemed instant rebates suggests the practice may be motivated by additional considerations, an issue we tackle in this paper. Our results demonstrate that consumer rebates can be particularly useful when a supply chain encounters inefficiencies stemming from strategic inventory buildup by retailers. Wary of high wholesale prices, a retailer may hold excess inventory to convey a lower willingness to pay in future interactions and thereby strategically undercut future wholesale prices. As a retaliatory consequence, the manufacturer sets high near-term wholesale prices. The “pull” promotion from consumer rebates encourages more timely retail sales and in doing so undercuts (but does not eliminate) the retailer's strategic inventories. In other words, the introduction of consumer rebates can serve as an enticement for retailers to sell, not just for consumers to buy. Perhaps surprisingly, we find that the manufacturer, retailer, and consumers alike all benefit from the use of rebates, this despite the fact that the manufacturer uses the rebates in self interest and as a strategic weapon. This paper was accepted by Yossi Aviv, operations management.