The Effect of Delayed Incentives on Supply Chain Profits and Consumer Surplus

We examine the use of consumer cash mail‐in rebates offered by a manufacturer in a Stackelberg game where the manufacturer is the leader and the retailer is the follower. Our analysis indicates that rebates are profitable for manufacturers if consumers are inconsistent in the sense that their rebate valuation when they make purchase decisions is independent of their redemption probabilities when they make redemption decisions. If the manufacturer keeps the wholesale price unchanged, then the rebate increases the retailer's profit by a larger amount than the increase in the manufacturer's profit. If the manufacturer jointly optimizes the wholesale price and rebate, then the increase in the manufacturer's profit is twice the increase in the retailer's profit. The retailer responds to rebates by increasing the retail price, which increases the margin paid by consumers who do not redeem the rebate. On average, consumer surplus decreases when it is optimal for manufacturers to offer rebates. We suggest incentive schemes that make it worthwhile for retailers to limit the price increase. In these incentive schemes, the manufacturer imposes a negative relationship between the rebate value and the retail price. We show that such incentives increase supply chain profits.