Customer rebates and retailer incentives in the presence of competition and price discrimination

Ozgun Caliskan Demirag, Pinar Keskinocak, Julie Swann

Research output: Contribution to journalArticle

25 Citations (Scopus)

Abstract

Promotions are important tools for matching supply and demand in many industries. In the United States automotive industry, promotions are frequently offered, which may be given directly to customers (rebates) or given to dealers (incentives) to stimulate demand. We analyze the performance of customer rebate and retailer incentive promotions under competition. We study a setting with two manufacturers making simultaneous pricing and promotion decisions, and with two price-discriminating retailers as Stackelberg followers making simultaneous order quantity decisions. In the benchmark case with no promotions, we characterize the equilibria in closed form. We find that retailer incentives can be used by manufacturers to simultaneously improve each of their profits but can potentially lead to lower retailer profits. When manufacturers use customer rebates, we show that a manufacturer is able to decrease the profit of her competitor while increasing her own profit, although she is also at risk for her competitor to use rebates in a similar fashion. Unlike the monopoly case where the manufacturers are always better off with retailer incentives, customer rebates can be more profitable under some cases in the presence of competition. Using numerical examples we generate insights on the manufacturers' preference of promotions in different market settings.

Original languageEnglish (US)
Pages (from-to)268-280
Number of pages13
JournalEuropean Journal of Operational Research
Volume215
Issue number1
DOIs
StatePublished - Nov 16 2011

Fingerprint

Incentives
Discrimination
Profitability
Customers
Profit
Automotive industry
Industry
Pricing
Promotion
Rebates
Retailers
Price discrimination
Closed-form
Benchmark
Costs
Numerical Examples
Decrease

All Science Journal Classification (ASJC) codes

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

Cite this

@article{b0ef8495d82844c68ae2bf6c15463132,
title = "Customer rebates and retailer incentives in the presence of competition and price discrimination",
abstract = "Promotions are important tools for matching supply and demand in many industries. In the United States automotive industry, promotions are frequently offered, which may be given directly to customers (rebates) or given to dealers (incentives) to stimulate demand. We analyze the performance of customer rebate and retailer incentive promotions under competition. We study a setting with two manufacturers making simultaneous pricing and promotion decisions, and with two price-discriminating retailers as Stackelberg followers making simultaneous order quantity decisions. In the benchmark case with no promotions, we characterize the equilibria in closed form. We find that retailer incentives can be used by manufacturers to simultaneously improve each of their profits but can potentially lead to lower retailer profits. When manufacturers use customer rebates, we show that a manufacturer is able to decrease the profit of her competitor while increasing her own profit, although she is also at risk for her competitor to use rebates in a similar fashion. Unlike the monopoly case where the manufacturers are always better off with retailer incentives, customer rebates can be more profitable under some cases in the presence of competition. Using numerical examples we generate insights on the manufacturers' preference of promotions in different market settings.",
author = "Demirag, {Ozgun Caliskan} and Pinar Keskinocak and Julie Swann",
year = "2011",
month = "11",
day = "16",
doi = "10.1016/j.ejor.2011.04.006",
language = "English (US)",
volume = "215",
pages = "268--280",
journal = "European Journal of Operational Research",
issn = "0377-2217",
publisher = "Elsevier",
number = "1",

}

Customer rebates and retailer incentives in the presence of competition and price discrimination. / Demirag, Ozgun Caliskan; Keskinocak, Pinar; Swann, Julie.

In: European Journal of Operational Research, Vol. 215, No. 1, 16.11.2011, p. 268-280.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Customer rebates and retailer incentives in the presence of competition and price discrimination

AU - Demirag, Ozgun Caliskan

AU - Keskinocak, Pinar

AU - Swann, Julie

PY - 2011/11/16

Y1 - 2011/11/16

N2 - Promotions are important tools for matching supply and demand in many industries. In the United States automotive industry, promotions are frequently offered, which may be given directly to customers (rebates) or given to dealers (incentives) to stimulate demand. We analyze the performance of customer rebate and retailer incentive promotions under competition. We study a setting with two manufacturers making simultaneous pricing and promotion decisions, and with two price-discriminating retailers as Stackelberg followers making simultaneous order quantity decisions. In the benchmark case with no promotions, we characterize the equilibria in closed form. We find that retailer incentives can be used by manufacturers to simultaneously improve each of their profits but can potentially lead to lower retailer profits. When manufacturers use customer rebates, we show that a manufacturer is able to decrease the profit of her competitor while increasing her own profit, although she is also at risk for her competitor to use rebates in a similar fashion. Unlike the monopoly case where the manufacturers are always better off with retailer incentives, customer rebates can be more profitable under some cases in the presence of competition. Using numerical examples we generate insights on the manufacturers' preference of promotions in different market settings.

AB - Promotions are important tools for matching supply and demand in many industries. In the United States automotive industry, promotions are frequently offered, which may be given directly to customers (rebates) or given to dealers (incentives) to stimulate demand. We analyze the performance of customer rebate and retailer incentive promotions under competition. We study a setting with two manufacturers making simultaneous pricing and promotion decisions, and with two price-discriminating retailers as Stackelberg followers making simultaneous order quantity decisions. In the benchmark case with no promotions, we characterize the equilibria in closed form. We find that retailer incentives can be used by manufacturers to simultaneously improve each of their profits but can potentially lead to lower retailer profits. When manufacturers use customer rebates, we show that a manufacturer is able to decrease the profit of her competitor while increasing her own profit, although she is also at risk for her competitor to use rebates in a similar fashion. Unlike the monopoly case where the manufacturers are always better off with retailer incentives, customer rebates can be more profitable under some cases in the presence of competition. Using numerical examples we generate insights on the manufacturers' preference of promotions in different market settings.

UR - http://www.scopus.com/inward/record.url?scp=79960903708&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=79960903708&partnerID=8YFLogxK

U2 - 10.1016/j.ejor.2011.04.006

DO - 10.1016/j.ejor.2011.04.006

M3 - Article

AN - SCOPUS:79960903708

VL - 215

SP - 268

EP - 280

JO - European Journal of Operational Research

JF - European Journal of Operational Research

SN - 0377-2217

IS - 1

ER -