Friday, February 17, 2006

Mail-in rebates that save most consumers zilch

Mail- in rebates on consumer goods - 'cashbacks' in Australia - that must be applied for by filling in forms - are everywhere. They are popular, according to Business Week , because 40% of them are never claimed. Shoppers dislike the hassles of filling in forms and mailing them to claim $10 or whatever it is. Customers are lazy, forgetful and busy. In addition firms design rules for claiming rebates that are restrictive and complex - claims for example must be made very promptly or the customer isd ineligible. In some cases complete address details cannot be entered on forms claiming rebates so the refunds never get through. Such rebates however get customers to focus on the discounted price even though 60% will pay the full undiscounted price.

Such rebates are quite an industry. Cell-phone vendors who offer 100% rebates on their products rely on 'breakage' (non-collection of rebates) to make money.

In California proposals to regulate rebate arrangements (to avoid hoops and hassles) were passed by the California House and Senate only to be knocked back by, Governor Schwarzennegger. There is some sort of case for regulation - customers have the right to know the price they will be charged for an item. A quick scout around the ACCC website did not reveal to me any policy - other than motherhood statements about consumer rights to know the full price of goods - in Australia.


Rabee said...

I use “conditional rebates” with my students.

For instance, I set a date for handing in an assignment and tell the students that I am willing to review their work prior to submission if:
a) They give me the work two weeks prior to the due date.
b) The work is ready for submission (typed on a computer).

Students rarely take the opportunity to get their work pre-reviewed, but they seem to be very happy that I gave them the option. I think that giving them this option has improved my evaluation scores.

In short rebates with conditions are options. The cost of exercising these options is the opportunity cost of getting the rebate. An option has exante value even when it turns out that it has no value expost.

A person buying a good with a rebate may think, if it happens that I’m not busy next week, then I’ll fill out the forms and get $10 back. So I doubt that a consumer who knows for sure that she won’t have the time will pay any attention to a rebate. Similarly, if a consumer suspects that she has the required time, then she will take the rebates seriously.

I don’t see a problem with “conditional rebates” so long as the people offering rebates are clear about the conditions.

hc said...

Rabee, Let me deal with your arguments in two stages:

(i) A problem with 'cashbacks', unlike your offer to students, is that the terms are not transparent. They conceal details of the conditions giving the rebate, you have to jump hoops and so on. I know this is not your main point but this is a major rationale for regulation.

(ii) Ignoring point (i) your argument is just an expression of the standard 'rational choice' model. If people are given good information about things, they can't be conned into making a decision they will regret. They just weigh up costs and benefits. You don't need option value arguments to get this.

The point about offering 'rebates' is that by making a consumer's choice problem more complex you can get bad decisions. People will focus on the price net of discount without going into details of the costs of getting the discount.

What your comment does suggest is that consumers should be informed that such rebates are often not what they seem and to take care.

I like your 'conditional rebate' idea in relation to students. It is not deceptive and seems to advantage all.

Rabee said...

I’m now wondering if one can design rebates to price discriminate.


Anonymous said...

Whether rebates are part of a price discrimination scheme would probably depend on what other price/quality combinations are offered by the same firm (or more broadly, other firms). In some circumstances it could be part of a two-part price (with a negative or less positive fixed component of the price).

If the firm offered other products without rebates (either over time or simultaneously), then rebates could be used as part of a second degree price discrimination scheme. Maybe it is a bit like the search cost model, where those with high search costs/rebate obtaining costs) pay the high price and those with lower costs pay the lower price (Salop has a model along these lines). The bounded rationality story Harry is using is like search costs (but we don't necessarily intervene to reduce search costs in markets).

I think the option value story is interesting though - are there parallels in financial markets?