A Joint Optimal Model of Pricing, Rebate Value, and Redemption Hassle

Abstract

Although rebates are widely employed, redemption is not effort-free, and the hassle of redemption is an important decision variable for buyers. The current research examines the impact of hassle cost on optimal rebate strategy. An analytical model is developed that simultaneously determines the supply chain’s optimal price, level of rebate value, and rebate-redemption hassle, while allowing for slippage (as consumers may forget to redeem a rebate), in both a centralized and decentralized supply chain. Results show that the level of rebate-redemption hassle plays a key role in segmenting the market into rebate and non-rebate purchasers. Whereas in a centralized supply chain redemption hassle should increase in a convex manner with valuations, no such restrictions exist in a decentralized supply chain. This difference is due to double marginalization, which results in higher retail prices in the decentralized supply chain. Rebates can be used to reduce this double marginalization. Furthermore, a manufacturer in a decentralized supply should offer a more attractive rebate than in a centralized supply chain. We also find that changes in the supply chain’s optimal price and rebate strategy are non-linear and non-monotonic in both production cost and in the elasticity for consumers’ disutility for hassle. Finally, findings are all supported by results from numerical analyses. Overall, our work contributes theoretically and managerially to the study of rebates by jointly considering price, rebate value, and redemption hassle.

Keywords: pricing, rebates, redemption hassle, segmentation, centralized and decentralized supply chain

JEL Classification: C7, D1, D4, M21, M31