Prices, promotions, and channel profitability: Was the conventional wisdom mistaken?

Because of the lack of empirical evidence supporting the shift of economic power from manufacturers to retailers, it has been claimed that the conventional wisdom that retailers benefit more from the use of consumer promotions was mistaken. This paper assesses this claim and examines how two different pricing approaches during manufacturers’ instant price promotions targeted at consumers impact on channel profits in a bilateral monopoly. We found that manufacturers should only offer rebates when they keep their prior-to-promotion wholesale prices unchanged. Consistent with the conventional wisdom, retailers do indeed take the lion’s share of the promotion incremental profits. Surprisingly, however, we found that in the largest part of the parameter space, manufacturers still earn more total channel profits than retailers over time. The theoretical and managerial implications of these findings are discussed.