Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, May 18, 2020

Return Strategy and Pricing in a Dual-Channel Supply Chain

Guo Li, University of Texas at Dallas; Beijing Institute of Technology, Suresh Sethi, University of Texas at Dallas - Naveen Jindal School of Management, Lin Li, Beijing Institute of Technology, and Xu (Gavin) Guan, School of Management, Huazhong University of Science and Technology offer Return Strategy and Pricing in a Dual-Channel Supply Chain.

ABSTRACT: This study investigates the strategic effect of return policies in a dual-channel supply chain, in which a manufacturer can sell products directly to end customers and indirectly via an independent retailer. The manufacturer decides whether to implement a return policy in either the direct or indirect channel, or in both channels. When the return policy is provided, the cost of returned products has to be covered by the corresponding channel. We consider four possible strategies, including full refund in the direct channel only, full refund in the indirect channel only, full refund in both channels, and no refund in both channels. Given the equilibrium pricing strategies of firms, the preferences of firms over different strategies are determined by comparisons between the anticipated return rate of customers and their perceived value of the return policy. The manufacturer prefers the full-refund policy in both channels when the return rate of the customer is low. Otherwise, the dominant strategy for the manufacturer is the no-refund policy in both channels. The retailer benefits more from the full-refund policy in the indirect channel alone when the return rate is low; otherwise, the retailer prefers the full-refund policy in the direct channel only.

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