Returns Policies and Retail Price Competition

Abstract

We show that returns policies increase manufacturer profitability by attenuating price competition between retailers. This effect holds only in the presence of end-user demand uncertainty. The conditions under which a returns policy raises the manufacturer's profit are weaker when retailing is a duopoly than when retailing is a monopoly. This suggests that returns policies serve both to dampen competition and resolve demand uncertainty.

Keywords: Channels, returns, competition, pricing

JEL Classification: D43, D83, L13, M30