Optimal Pricing and Rebate Strategies in a Two-Level Supply Chain
Version of Record online: 14 APR 2009
© 2009 Production and Operations Management Society
Production and Operations Management
Volume 18, Issue 4, pages 426–446, July/August 2009
How to Cite
Cho, S.-H., McCardle, K. F. and Tang, C. S. (2009), Optimal Pricing and Rebate Strategies in a Two-Level Supply Chain. Production and Operations Management, 18: 426–446. doi: 10.1111/j.1937-5956.2009.01035.x
- Issue online: 1 JUL 2009
- Version of Record online: 14 APR 2009
- History: Received: October 2007; Accepted: June 2008 by Teck-Hua Ho; after 2 revisions.
- marketing/operations interface;
- supply chain management;
- vertical competition
For many product categories, manufacturers and retailers often offer rebates to stimulate sales. Due to certain adverse effects, however, some manufacturers and retailers are contemplating the elimination of their rebate programs. This paper sheds light on the debate about the value of rebate programs by presenting a model for evaluating the conditions under which a firm should offer rebates in a competitive environment. Specifically, we consider a two-level supply chain comprising one manufacturer and one retailer. Each firm makes three decisions: the regular (wholesale or retail) price, whether or not to offer rebates, and the rebate value should the firm decide to launch a rebate program. We determine the equilibrium of a vertical competition game between the manufacturer (leader) and the retailer (follower), and we provide insights about how competition affects the conditions under which a firm should offer rebates in equilibrium.