Trade discount is a discount given to reseller. If the company sells own products at certain price (e.g. shown in catalog, list, retail price) it gains some profit. However, it cannot access every potential customer. Therefore many companies cooperate with multiple resellers, who can access those customers. Reseller will work for a fee. But it isn't possible to increase price for customer. Thus the price for customer stays the same, and reseller gets trade discount from the company.
Is it profitable for the company to give trade discount? In many situations it is. The company doesn't have to keep own network of stores, employ workers. However, in some cases the company can become dependent on large resellers, e.g. network of hypermarkets. That can be dangerous, as the large reseller can force higher discounts on the company.
- Huang, Y. F., & Chung, K. J. (2003). Optimal replenishment and payment policies in the EOQ model under cash discount and trade credit. Asia Pacific Journal of Operational Research, 20(2), 177-190.
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