Scanbacks and direct rebates: manufacturer's tools against forward buying

This paper evaluates the role of trade incentives specifically designed to fight forward-buying practices on the part of retailers, by examining the use of scanbacks and direct rebates as manufacturerers' tools for the prevention of these practices. Scanner data allow the manufacturer to keep track of the retailer's pricing policies at the point of sale and hence tie its discount policy to the magnitude of the retailer's pass-through to the final customers. Trade incentives of this type are called scanbacks, whereby the determination of the retailer's compensation is based on actual performance normally measured by scanner data. Another incentive is the direct rebate, whereby the manufacturer passes on directly to the final customer some discount, normally in the form of a coupon, upon proof of purchase. Rebates are one of the oldest trade incentives and certainly predate the advent of electronic commerce. Their relevance is enhanced by the fact that they can be easily adapted to the modern B2B marketplace. The economic effects of these incentives are evaluated in terms of their effect on the three basic links of the supply chain in question, namely (i) the manufacturer that offers the incentive; (ii) the retailer that develops the optimal pricing and ordering policy for each manufacturer's incentive; and (iii) the final customer who is the ultimate purchaser of the merchandise.