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Slippage in Rebate Programs and Present-Biased Preferences

Department of Economics, University of Tennessee, Knoxville, Tennessee 37996
sgilpatr{at}utk.edu

Present-biased preferences capture the idea that individuals may find immediate payoffs significantly more salient than any future payoffs, rather than simply discounting the future in a time-consistent manner. In this paper we show that consumers' present-biased preferences can generate slippage, and we explore whether this can explain firms' use of mail-in rebates. We assume that the consumer population comprises members who have various degrees of present bias. The model demonstrates that if consumers have homogeneous willingness to pay for a product (and thus rebates do not serve as a mechanism for traditional price discrimination) rebates may still profitably exploit slippage, but to do so they must generate very high slippage rates. This is, because the rebate must greatly exceed the price markup because the rebate must compensate consumers for the cost of redemption and the delay in receiving the rebate. The ability of rebate programs to take advantage of present-biased consumers is quite limited in settings where there is significant variance in the degree of present bias within the population unless the extent of consumers' present bias is highly correlated with their rebate redemption costs.

Key Words: present-biased preferences; rebates; slippage; price discrimination
History: Received: September 21, 2005; accepted: December 5, 2007.