Returns Policies Between Channel Partners for Durable Products

Mehmet Gümüş · Saibal Ray · Shuya Yin

60 citations0/0 files storedMarketing Science

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Supply Chain and Inventory Management Consumer Market Behavior and Pricing Sustainable Supply Chain Management

Abstract

Many durable products with relatively short selling seasons have been using returns policies between manufacturers and retailers as the contractual protocol for some time. Recently, these sectors have witnessed the growing popularity of peer-to-peer Web-based used goods markets as important transaction channels between buyers and sellers. Given that these two issues are critically linked from both supply and demand perspectives, in this paper we study the role that consumer valuation of used products plays in shaping a manufacturer's incentive to offer a returns policy option to a retailer when used goods might be devalued compared to new ones as a result of physical deterioration (or obsolescence). We do so through a two-period dyadic channel framework where the retailer faces uncertain demand for a durable product from a renewable set of customers who are impatient but forward looking. The manufacturer, on the other hand, needs to decide whether or not to offer a returns contract to the retailer. We first characterize the necessary and sufficient condition under which a returns contract is the equilibrium strategy as well as the corresponding channel decisions. Further analysis of this condition reveals that a higher consumer valuation of used products increases the likelihood of a returns contract being the equilibrium strategy. This result seems to be robust except when the potential demands for the two periods are quite deterministic and uncorrelated. However, it contradicts the burgeoning managerial trend to replace returns contracts with price-only ones in sectors where used goods are valued relatively highly by the consumers. We also discuss how used goods markets affect the equilibrium channel decisions as well as how demand uncertainty and logistics costs associated with returns influence the equilibrium contracting strategy.

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References

1985Optimal Pricing and Return Policies for Perishable Commodities 2006The Effect of Competition on Recovery Strategies 2008Optimal Pricing and Return Policies for Perishable Commodities 2006Managing New and Remanufactured Products 1998Note. The Role of Returns Policies in Pricing and Inventory Decisions for Catalogue Goods 1997Manufacturer's Return Policies and Retail Competition 2005Matching Supply with Demand: An Introduction to Operations Management 2005Optimal Prices and Trade-in Rebates for Durable, Remanufacturable Products

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2014Return policy: Hassle‐free or your money‐back guarantee?2017Optimizing the return window for online fashion retailers with closed-loop refurbishment 2018The impact of abusing return policies: A newsvendor model with opportunistic consumers 2021Trade‐In or Sell in My P2P Marketplace: A Game Theoretic Analysis of Profit and Environmental Impact 2022Linking product design and durability: A review and research agenda

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