The role of rebates in the hybrid competition between a national brand and a private label with present-biased consumers

Over the past years, rebates have been increasingly used by national brand (NB) manufacturers. Conventional wisdom suggests that rebates are beneficial to firms as long as positive slippage exists. Based on the present-biased preference theory, we investigate the performance of NB rebates as a counterstrategy to the retailer's private label (PL). Game theoretic models are developed to characterize channel dynamics. Involving consumers' knowledge levels of the present-biased preferences, our model reveals multiple insights. First, a positive slippage rate does not necessarily benefit the NB manufacturer if the rebates fail to expand the demand of the NB. Second, the retailer's commitment to the original NB price plays a positive role in improving the equilibrium profits of both parties. Third, for loss-averse consumers under preference uncertainties, the NB manufacturer and the retailer prefer a low redemption cost, in contrary to the conventional idea that sellers take advantage of consumers with high redemption costs. (C) 2013 Elsevier B.V. All rights reserved.