A Characterization of Retailer Response to Manufacturer Trade Deals

Abstract

In this article, the author provides a simple characterization of retailer response to manufacturer trade deals in terms of the consumer demand conditions that the retailer faces. Specifically, the author shows conditions on the curvature of consumer demand functions that make it optimal for a profit-maximizing retailer to pass through greater (less) than 100% of the trade deal amount it gets from a manufacturer. Using these conditions, the author demonstrates that whereas the linear and all concave consumer demand functions lead to less than 100% optimal retail pass-through, there exists a subset of convex consumer demand functions for which a retailer rationally engages in greater than 100% pass-through. This subset contains many commonly used demand functions, such as the constant elasticity demand function, the negative exponential demand function, and many other varying elasticity demand functions.