1. This case describes one reason manufacturers might want to offer rebates rather than decrease wholesale price. Explain why this can be viewed as an example of customized pricing.
The one-price-fits-all model is rapidly becoming extinct particularly in the world of e-commerce where every purchase and link clicked on (and much more) is stored, evaluated with the result being a customized price/offer based on many factors including credit score and buying habits. Rebates are an example of customized pricing because it draws in customers who won’t pay the retail price as well as those who would regardless of the rebate. Similar to Jockey’s pricing. Jockey underwear goes on sale every six months to meet high and low reservation-price customers. There people who will buy computer and underwear only when they need it. Others need to be dragged in by a sale or rebate.
The dirty little secret about rebates is that 40% are unclaimed totaling a give back to retailers of $2 billion. This partly a “tax on the disorganized,” as the authors note, but retailers often make the rules for redeeming rebates so Byzantine that consumers give up or forget that their check never came because the application was rejected for some picayune reason. Such was the case of Samsung in New York. The company’s rebates for apartment dwellers weren’t processed because there was not a block to include apartment numbers on the rebate form. The state attorney general made Samsung pay up. I would like to see the stoutest libertarian read this case study and make a coherent argument against government regulation!
2. Even if all rebates were redeemed, why might manufacturers still want to offer rebates rather than decrease wholesale prices?
Retailers can claim full revenue on the books, and thus it appears as if they have cash flow they otherwise wouldn’t. This can drive up stock price as the rebates can be an expense that can be written off. Also, the rebate price still gets consumer in the store or on the site when the regular price might not. Once that happens (the hook is set!) anything is possible, and even if nothing is purchased a nascent relationship of familiarity has been initiated. Lastly, even if the rebate is redeemed that retailer may have made a profit it otherwise wouldn’t have, and in selling the product, a printer for example, the retailer may have up sold a warranty and now has the consumer on the hook for supplies.
3. Why do you suppose that Best Buy, rather than one of Best Buy’s big suppliers such as Sony or Panasonic, is considering eliminating rebates?
Suppliers like Sony or Panasonic are, with some variation, charging all retailers the same price per particular unit. At what price the retailers like Best Buy, the world’s largest consumer products retailer, sell the unit at is not of particular concern to the suppliers, and notably the suppliers don’t process the rebates. On the pointy end of the retail spear is Best Buy and it is considering eliminating rebates because their pre-rebate price often matches or beats the rebated price of many other retailers. Thus rebates are a money-losing proposition for Best Buy on the units for which the rebate is actually processed and the check cashed. From the customer end of it, Best Buy has been besieged my customer complaints and per online research this is a driver towards its consideration to end rebates. Additionally, there are associated costs with rebates. A bitter pill to swallow if the practice isn’t profitable.