A joint optimal pricing, rebate value, and lot sizing model

Delayed incentives in the form of mail-in cash rebates are very popular among manufacturers, and more recently, among retailers. One of the main advantages of rebates is that while they increase demand, a small proportion of consumers redeem them. In this paper, we formulate and solve models for jointly determining the optimal price, rebate face value, and the optimal order quantity for a price and rebate sensitive deterministic demand. The models show that under realistic conditions, offering rebates can have significant pricing and inventory policy implications and can lead to a significant increase in profit.