Retro Payment as a Technique in Retail Market Strategy: A Model and Data From Russia

Retailers and manufacturers engage in complex interactions that incorporate various techniques for stimulating demand. Retro payments or rebates are one such technique that is used very intensively in Russia. The regulatory regime in Russia is quite unique in having a separate commercial law regulating the interaction of the various parties involved. The Law on Trade (introduced in 2010 and updated in 2016) limits the amount of the retro payments for retailers, caps the market share of a retailer in a given region, specifies payment terms, and places specific requirements on how counterparties are to be chosen. The main idea behind the model developed in this article is to consider the comparative statics for combinations of strategic variables, which the retailer identifies at a given time. A change in the wholesale price will trigger a simultaneous change in both the front margin and the retro payment. Likewise, a change in the retro payment (due either to changing demand or government regulation) will prompt simultaneous changes in both the front margin and in demand for a branded product (and ultimately in retail prices), as well as in the price for branded products and for a retailer’s private label goods. The amount of retro payment is both a driver of profit for each unit of a branded product sold and also an incentive for the retailer to replace a private label product with an externally branded one. Limiting the amount of retro payments will cause a corresponding increase in the front margin which is needed by the retailer to maintain the same profit on each sale. Based on the results of the model, the authors recommend that direct limitation of any techniques used in commercial transactions be avoided and that regulatory efforts be aimed at ensuring fair competition, that is, equal conditions for all market participants.

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