Firms are better off using rebates rather than just lowering the price of a good because
A)people view the firm in a positive light because now poorer people will be able to afford their good.
B)customers overestimate the value of the rebate and so buy more of the good, making profits higher than if they just lowered the price.
C)only those who place a low value on their time or are price sensitive actually redeem the rebate, making profits higher than if they just lowered the price.
D)lowering the price is inefficient and creates additional deadweight loss.

Question

Quizplus · Accepted Answer

Rebates are beneficial because only a fraction of customers will actually redeem them, meaning costs will be lower than if the firm just lowered the price. Customers also tend to overvalue the rebate, so they are more likely to purchase the good, increasing profits. Option A is incorrect because people who are unable to afford the good will not benefit from a rebate if they cannot initially afford it. Option B is incorrect because customers overestimate the rebate value, but it does not result in higher profits if they were to just lower the price. Option D is incorrect because there is no evidence to suggest lowering the price is inefficient and creates additional deadweight loss.

Firms Are Better Off Using Rebates Rather Than Just Lowering