Supply Chain Coordination Under Channel Rebates with Sales Effort Effects

A channel rebate is a payment from a manufacturer to a retailer based on retailer sales to end consumers. Two common forms of channel rebates are linear rebates, in which the rebate is paid for each unit sold, and target rebates, in which the rebate is paid for each unit sold beyond a specified target level. When demand is not influenced by sales effort, a properly designed target rebate achieves channel coordination and a win-win outcome. Coordination cannot be achieved by a linear rebate in a way that is implementable. When demand is influenced by retailer sales effort, a properly designed target rebate and returns contract achieves coordination and a win-win outcome. Other contracts, such as linear rebate and returns or target rebate alone, cannot achieve coordination in a way that is implementable. Contrary to the view expressed in the literature that accepting returns weakens incentives for retailer sales effort, we find that the provision of returns strengthens incentives for effort.