Friday, November 10, 2006

On Rebates

This morning I heard a piece on NPR regarding vendors of consumer electronics. The subject of rebates arose and predictable disapproval and poo-pooing of rebates ensued. It's certainly not the first time I've seen rebates dissed. People seem to hate rebates. I don't. I like them. Let me explain why.

When people think of rebates they tend to think "Why don't you just give my my thirty bucks back RIGHT NOW ALREADY!" In order to understand rebates, however, you need to look at rebates through the eyes of the vendor.

When vendors offer a $30 rebate, they don't assume everyone who buys one unit of the product will submit one rebate. If the vendor had to discount every unit sold by $30, the rebate wouldn't be offered at all--at least in such a large denomination, because it would be economically unfeasible for the vendor to make such an offering.

In reality, only a relatively small percentage of people actually go to the trouble of submitting rebates. Vendors know this, and that knowledge factors into the size of the rebate offered. When vendors offer a $30 rebate, it's often the case that only 10% of buyers actually go to the trouble of jumping through the hoops and properly submitting the rebate. Through the eyes of a vendor, the bottom line is an average rebate per unit of $3.

If you're among the 10% (or other small percentage) who successfully submit the rebate, you not only receive the average $3 rebate per unit due to you from an egalitarian perspective (what a buyer would get in a world where everyone got a rebate)--you also receive the average rebate per unit due to the other 90% of buyers who didn't send in the rebate (i.e., in this case $27).

Basically, you get 10X (or some other relatively large factor) more back in a world where only the rebate hoop jumpers get their money back than you would get back in a world where everyone got a rebate; e.g., $30 back vs. $3 back. That's a good thing, IMHO.

In the parlance of economists, this is a form of price discrimination. Check out the Wikipedia entry for more information.


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