The Strategic Use of Early Bird Discounts for Dealers

39 Pages Posted: 27 Jul 2013 Last revised: 6 Feb 2018

See all articles by Desmond (Ho-Fu) Lo

Desmond (Ho-Fu) Lo

Santa Clara University, Department of Marketing

Stephen W. Salant

University of Michigan; Resources for the Future

Date Written: February 29, 2016

Abstract

We study a widely used ordering process (“Early Bird Discounts”) whereby a profit-maximizing manufacturer permits his dealers to place advance orders at a discount before they set retail prices. We show that such discounts may be used to shift just enough channel profits to dealers to enable them to cover their fixed costs and stay in business. If the manufacturer instead simply cut his wholesale price in order to generate gross margins for his dealers, these margins would soon dissipate as price competition among dealers selling the same product forced retail prices back down to the per-unit cost. We show that when dealer fixed costs are low, the manufacturer offers an Early Bird Discount to his multiple dealers that induces all but two of them to exit; when fixed costs are high, the manufacturer offers no preorder discount (i.e. switches to linear pricing) and induces all but one dealer to exit. Although uniform slotting allowances could also be used to reward dealers, a sales-based alternative like an Early Bird Discount sometimes has a key advantage when the manufacturer has dealers in cities of different sizes. If the same Early Bird Discount is offered, dealers in markets with more consumers, who typically have larger fixed costs, will preorder larger amounts and will automatically receive higher gross margins. To duplicate such payments with slotting allowances, non-uniform allowances would have to be offered to firms in different markets, which is divisive and possibly illegal.

Keywords: Vertical Relationships; Marketing Channels; Sales Discounts; Slotting Allowances; Two-Part Pricing; Constrained-Capacity Oligopoly Games

JEL Classification: D43, L13, M31

Suggested Citation

Lo, Desmond (Ho-Fu) and Salant, Stephen W., The Strategic Use of Early Bird Discounts for Dealers (February 29, 2016). Available at SSRN: https://ssrn.com/abstract=2298949 or http://dx.doi.org/10.2139/ssrn.2298949

Desmond (Ho-Fu) Lo (Contact Author)

Santa Clara University, Department of Marketing ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

HOME PAGE: http://www.scu.edu/business/marketing/faculty/lo.cfm

Stephen W. Salant

University of Michigan ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
313-764-2370 (Phone)
313-764-2769 (Fax)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

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