I've Always Wondered ...

What are the origins of rebates? 

Janet Nguyen Oct 6, 2023

This is just one of the stories from our “I’ve Always Wondered” series, where we tackle all of your questions about the world of business, no matter how big or small. Ever wondered if recycling is worth it? Or how store brands stack up against name brands? Check out more from the series here.

Listener Alex Klein from Ottawa, Canada, asks: 

I’ve been thinking more about ways to save money in times of high inflation like we are currently seeing here in Canada, but also in the U.S. This got me thinking more about the various methods companies and stores use for consumers to save money: coupons and rebates. Where did the “rebate” as a consumer savings tool come from, and why do I associate it so closely with new car tires?

Whether you’re buying car tires, clothing or food, you’ve noticed that companies have sometimes offered discounts in the form of rebates, which apply only after certain conditions are met, like mailing in your proof of purchase or buying a certain amount of that item. 

“A rebate is, in some sense, a way of charging two different prices to two different people,” explained Meghan Busse, an associate professor of management and strategy at Northwestern University. 

Busse said those two types of people are: 1) Those who notice a rebate and are willing to make the effort to get money back. Or, at least, those who think they will. 

2) Those who don’t think it’s worth their time and will end up paying the full price.  

“The company usually is betting that busier higher income people are less likely to value that rebate enough to fill out the paperwork,” Busse said. 

Basically, she said, it’s a way for companies to have their cake and eat it too. 

While we’re familiar with rebates as a way to get lower prices on everyday products, rebates have a long history and were even once used by railroads as a form of price discrimination.  

The history of rebates

The term “rebate” goes back centuries. 

“Between the 1400s and the 1850s it was a banking term having to do with credit instruments called ‘bills of exchanges.’ Only bankers and investors used the term,” explained Scott Reynolds Nelson, a history professor at the University of Georgia, in an email. 

Then, in the 19th century, railroads used rebates to set different prices for passengers and shippers. They provided them to large shippers or buyers, which harmed groups like American farmers whose shipment volume wasn’t as large, according to the National Archives. 

“They became a matter of great controversy,” said Richard White, professor emeritus of American history at Stanford University. 

White said if you were going to do business in the U.S. back then, you depended on the railroads.

“Railroads are common carriers, which means that under common law, and under regulatory law, they have to offer their services to the public, and they can’t discriminate against their customers. And what rebates allowed them to do is to favor some customers over other customers,” White said. “The railroads would pick winners and losers.”

Simon Cordery, a history professor at Iowa State University, said railroads were supposed to publish the price it cost to transport goods and people. By offering rebates in secret, they were violating those published rates, he said. 

Public awareness of rebates eventually became so widespread that in 1887, Congress passed the Interstate Commerce Act. It prohibited “rebates for individual shippers” and banned any preferential rates for specific localities, shippers or products, per the National Archive (although Cordery noted that in practice, the legislation lacked teeth). 

“The biggest difference between the rebates that the railroads offered and the rebates that you get walking into a grocery store or a home goods store, is that today, they’re out in the open and they’re available to anyone who purchased the good on which a rebate is being offered,” Cordery said. 

Nelson of the University of Georgia said that the word rebate was considered “pretty exotic” until reformers like Ida Tarbell figured out how rebates worked. 

“They became a symbol of monopolistic practices,” Nelson said.

But around 1900, retailers were using rebates, he added.

In the 1980s and 1990s, companies really began ramping up the use of rebates, said Adam Rottinghaus, assistant professor of media, journalism and film at Miami University.

As consumer data models and mechanisms came into their own and started to become a big focus for companies, rebates allowed them to collect consumer information, he explained. 

Why does the automobile industry offer rebates? 

Busse of Northwestern said she personally doesn’t associate rebates with car tires like our listener Alex Klein. But she does know why car manufacturers offer rebates, and it has to do with a legal idiosyncrasy of how cars are sold. 

“Every state in the country has some version of what’s called a dealer franchise law,” she said.

This law, which is aimed at protecting local car dealers, forbids auto manufacturers from directly selling consumers vehicles, Busse explained. 

“What this means is that manufacturers don’t have any direct way to influence the prices at which their vehicles are sold,” she said. “But what they can do is the manufacturers can offer a rebate to the end consumer.”

Compared to other types of businesses, manufacturers want to offer rebates because they can’t directly control prices.

How beneficial are rebates for consumers? 

While rebates offer money back to consumers, the process can be confusing because of the steps involved, said John Breyault, vice president of public policy, telecommunications and fraud at the National Consumers League. 

“It’s, I think, a type of advertising that has the potential to be a bit unfair and deceptive to consumers if it’s not done correctly,” Breyault said. 

Breyault said that if companies are going to offer rebates, they should offer instant rebates. Better yet, he said, just offer a lower price. 

So why don’t companies do just that? 

“The answer is they don’t want to. They want there to be some cost to doing it,” said Busse of Northwestern. Again, they want to be able to attract two different types of customer.

She said they also won’t mind if consumers overestimate their willingness to do what the rebate requires of them.

Busse recently bought contacts online from a company that would provide her with a rebate if she bought four boxes.

“In my head, I might calculate the price as whatever the posted price is minus $70. And that makes it seem like a good deal to me and I’m responding as if the price I’m going to pay is actually 70 bucks less,” Busse said. “But there’s a good chance that some set of people who see those prices and think that’s the price they’re gonna pay are in fact not going to follow all the way through.”

Breyault noted that companies are also changing the form in which rebates are offered. In the past, they might have provided consumers with a check, but now they’re increasingly providing them in the form of prepaid cards. 

He said those cards can come with restrictions — for example, you might only be able to use them at one retailer.

He noted that there are some companies that have made it easier for people to redeem rebates by allowing people to do it online. But he thinks companies generally count on consumers to forget. 

“It can often seem too good to be true,” he said. 

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