Using MSRP to enhance the ability of rebates to control distribution channels

Manufacturers have increasingly instituted widespread mail-in rebate programs in recent years. Two primary purposes for rebates are to: (1) more directly impact consumer demand by reducing net retail price, and (2) capitalize on consumers’ slippage behavior because not all consumers who intend to re...

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Bibliographic Details
Published in:European journal of operational research 2010-08, Vol.205 (1), p.127-135
Main Authors: Yang, Shilei, Munson, Charles L., Chen, Bintong
Format: Article
Language:English
Subjects:
Applied sciences
Channel control
Consumer behavior
Consumers
Distribution channels
Exact sciences and technology
Firm modelling
Inventory control, production control. Distribution
Logistics
Manufacturers
Marketing
MSRP
Operational research and scientific management
Operational research. Management science
Operations research
Pricing policies
Rebates
Retail stores
Studies
Supply chain management
Supply chain management Marketing Rebates MSRP Channel control
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Summary:Manufacturers have increasingly instituted widespread mail-in rebate programs in recent years. Two primary purposes for rebates are to: (1) more directly impact consumer demand by reducing net retail price, and (2) capitalize on consumers’ slippage behavior because not all consumers who intend to redeem the rebate at purchase time end up actually redeeming it. However, retailers can counteract the power of rebates to impact demand by simply raising the retail price by the amount of the manufacturer’s rebate. We show that by combining a manufacturer’s suggested retail price (MSRP) along with a rebate, the manufacturer can better control the channel by inhibiting the retailer’s ability to raise price, particularly when consumers exhibit loss aversion. As a result, incorporating MSRP with a rebate promotion plan increases the manufacturer’s profit. More surprisingly, the profit of the supply chain as a whole also increases, and the channel efficiency increases as well. In fact, contrary to results from the existing rebate literature suggesting that rebates should always be offered whenever slippage exists, we demonstrate that MSRP can actually be a more effective tool than rebates in managing retailer and consumer behavior when consumers do not have sufficient loss aversion and the slippage rate is low enough.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2009.12.018