Optimal rebate strategy for an online retailer with a cashback platform: commission-driven or marketing-based?

Abstract

This paper analyzes an emerging rebate mode where a cashback website not only serves as a promotional device in generating more sales for an online retailer, but also makes decisions on its marketing effort autonomously under certain product availability conditions set by the online retailer. Using a game-theoretic approach, this paper analyzes the optimal decision of both parties in commission-driven rebate mode and marketing-based rebate mode in a market dominated by the online retailer and cashback website respectively. Our main findings are as follows: (1) In the Retailer Stackelberg (RS) game, which rebate mode an online retailer will adopt is related to the marketing cost of the rebate channel and the consumer utility discount (UD) factor. (2) Both rebate modes will help the retailer to expand the market and increase profit because of price differentiation. (3) There is a possible price trap in marketing-based rebate mode. (4) In RS game, the effect of consumer UD factor on the optimal marketing effort is related to the product availability in the rebate channel. (5) In both RS game and Cashback-website Stackelberg (CS) game, the online retailer should strive to become a leader. However, the cashback website prefers the online retailer to be a leader when marketing cost is relatively low in the marketing-based mode. Our results, consistent with several real-world observations, have useful implications for marketers.