The effects of customer rebates and retailer incentives on a manufacturer's profits and sales

In some industries such as automotive, production costs are largely fixed and therefore maximizing revenue is the main objective. Manufacturers use promotions directed to the end customers and/or retailers in their distribution channels to increase sales and market share. We study a game theoretical model to examine the impact of ‘retailer incentive’ and ‘customer rebate’ promotions on the manufacturer's pricing and the retailer's ordering/sales decisions. The main tradeoff is that customer rebates are given to every customer, while the use of retailer incentives is controlled by the retailer. We consider several models with different demand characteristics and information asymmetry between the manufacturer and a price discriminating retailer, and we determine which promotion would benefit the manufacturer under which market conditions. When demand is deterministic, we find that retailer incentives increase the manufacturer's profits (and sales) while customer rebates do not unless they lead to market expansion. When the uncertainty in demand (‘market potential’) is high, a customer rebate can be more profitable than the retailer incentive for the manufacturer. With numerical examples, we provide additional insights on the profit gains by the right choice of promotion.