Consumer Returns Policies and Supply Chain Performance

Abstract:     
This paper develops a model of consumer returns policies. In our model, consumers face valuation uncertainty and realize their valuations only after purchase. There is also aggregate demand uncertainty, captured using the conventional newsvendor model. In this environment, consumers decide whether to purchase and then whether to return the product, while the seller sets the price, quantity, and refund amount.

Using our model, we study the impact of full returns policies (e.g., using 100% money back guarantees) and partial returns policies (e.g., when restocking fees are charged) on supply chain performance. Next, we demonstrate that consumer returns policies may distort incentives under common supply contracts (such as manufacturer buy-backs), and we propose strategies to coordinate the supply chain in the presence of consumer returns. Finally, we explore several extensions and demonstrate the robustness of our findings.

Keywords: consumer returns, supply chain, strategic customers, valuation uncertainty, newsvendor, contracting

JEL Classifications: D11, D24, L15

Working Paper Series