Selling format selection in the presence of rebate provision

Abstract

This paper investigates the sellers’ optimal rebate provision strategies in a supply chain setting wherein two competing sellers offer substitutable products via a common platform, and can choose whether to provide rebates to boost their respective sales. We consider two selling formats: wholesale format and agency format (with exogenous commission rate) to capture the interaction between the sellers and platform. We show that the sellers always choose to provide rebates under wholesale format, while only doing so under agency format when the commission rate is low. With either selling format, the sellers target both rebate-sensitive and rebate-insensitive consumers when the ratio of sensitive consumers is low enough, otherwise targeting only rebate-sensitive consumers as a means to explore the benefits derived from the offer of a rebate. With certain conditions, intensified competition will hurt the platform under wholesale format while benefit it under agency format, a result differs from when there are no rebates provided. The preferences of the sellers and the platform over two selling formats are jointly determined by the commission rate and the composition of consumers. When the ratio of rebate-sensitive consumers increases, sellers’ preference for the agency format first decreases and then increases. When this ratio is sufficiently high, charging a high commission rate will reduce the platform’s profit under agency format, making the wholesale format more preferable. We also consider an alternative scenario wherein the commission rate is endogenous and show that the results remain qualitatively intact.