Consumer Returns Policies and Supply Chain Performance

33 Pages Posted: 11 Oct 2007 Last revised: 8 May 2012

See all articles by Xuanming Su

Xuanming Su

University of Pennsylvania - Operations & Information Management Department

Date Written: August 2008

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 Classification: D11, D24, L15

Suggested Citation

Su, Xuanming, Consumer Returns Policies and Supply Chain Performance (August 2008). Available at SSRN: https://ssrn.com/abstract=1020451 or http://dx.doi.org/10.2139/ssrn.1020451

Xuanming Su (Contact Author)

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

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