A Theory of Forward Buying, Merchandising and Trade Deals

Manufacturer supported trade deals remain one of the major competitive tools in today’s market place. This is true despite the fact that such trade deals are often claimed to be unprofitable for manufacturers. The unprofitability is attributed to the fact that retailers forwardbuy and do not pass the price discounts on to the consumers. This paper studies the competitive nature of trade promotions by involving all three levels of the distribution system (manufacturers, retailers, and customers) and by modeling the dynamic effects of forward buying by retailers. We find that in equilibrium, manufacturers will sometimes offer trade promotions even though the retailers do not pass through these deals to the consumers. Moreover, the retail trade will sometimes accept trade deals, commit to retail merchandising, and forward buy. Furthermore, as observed in practice, the retailer tends to take turns merchandising brands of the different manufacturers because this enables the retailer to buy a larger number of units at a lower price. Finally, and most importantly, we show that manufacturers are better off in allowing retailers to forward buy. In this way, we provide a more complete explanation for the phenomenon of trade deals, as observed, both at the wholesale and retail level.