The Principal of the Rebate

Rebates are a post-compensation approach used by manufacturers when the distributors' sales volume reaches a certain standard. Compared with price discount, the rebate is an indirect way of discounting and the value of this method has yet to be given a reasonable explanation in industrial organization theory. Preliminary Study of the economics principles of rebates shown in this paper shows that rebates can overcome problems caused by double mark-up and achieve the goals of vertical structural optimization. At the same time, rebates can also eliminate the defects resulted from traditional vertical price restraints. From the principle point of view, combined with Quantity Fixing and Franchise Fees, rebates can replace the vertical restrictions. However, as an incentive for the distributors, rebates have their own characteristics. For example, rebates make reasonable distribution of benefit to all parties, and the mechanism to realize objectives is closer to the market rules, so fewer legal and social risks will arise. These practices, which are different from traditional vertical restrictions, should be grouped under the concept of vertical incentives, so as to illustrate the vertical measures which have with common features.