Cash Back : Asymmetric Information in Auto Manufacturer Promotions ∗

Automobile manufacturers make frequent use of promotions that give cash-back payments. Two common types of cash-back promotions are rebates to customers, which are widely publicized to potential customers, and rebates to dealers, which are not publicized. While the payments nominally go entirely to one party or another, the real division of the manufacturer-supplied surplus between dealer and customer depends on what price the two parties negotiate. We show that customers obtain most of the surplus in cases when they are likely to be well-informed about the promotion (customer rebate), and about half the surplus when they are likely to be uninformed (dealer rebate). However, manufacturers ultimately do not care about the price effect of a promotion; a thousand dollar promotion costs a manufacturer the same whether it is directed to customers or dealers. Instead, manufacturers are interested in whether a given promotion leads to the sale of an additional car. We find that customer cash promotions, consistent with the pass-through results, have a larger dollar-for-dollar effect on sales than do dealer cash promotions.