Essay: The Optimal Rebate Budget Point
Assuming the budget available is budget 1, the optimal rebate budget point is point O, where the available rebate budget equals rebate level sales. At point X, the rebate level is too high and the available budget cannot meet the cost of products to be sold. At point Z, the rebate level of too low and the available budget will not be spent. This means that at budget 2, the optimal level of rebate budget is at point P. It is apparent that line AB plays a very critical role in establishing the optimal rebate level. Then the marketing directors have the best data to draw line AB. On the other hand, the presence of market incentives limits them from having the best data, this makes them to utilize the auction format which a more competitive bidding format to derive data required to draw line AB. The auction format requires information about the item being auctioned, the bid, available market information and budget allocation.
By giving false information about their exact preferences, the manufacturers give lower incentives in the so-called gaming the system hence making them to have an advantage in the auction format. This means that if they give a very low anticipated sales level, they will get very low subsidies that will not be sufficient to enable them remain in business. On the other hand, if they give very high-anticipated sales level, they will cut the dollar per unit rebate level. To deter the markets from gaming the system, some goals are set and when not achieved may result to penalties and the degree of penalty varies. Additionally, the auction styles reveals in order in which the market is transforming. This is achieved by referring to the stored information from the auction style over time. In case the rebates required per market share are downward sloping, then the market is transforming and becoming less dependent on rebates. Centrally, in case the market is more dependent on the rebates over a long time, then the market is not making any progress towards being self sustainable.