Equilibrium Returns Policies in the Presence of Supplier Competition
Marketing Science, 2010
41 Pages Posted: 6 May 2009 Last revised: 22 Jan 2010
Date Written: January 19, 2010
The pioneering Pasternack returns-policy model (1985, 2008b) analyzed channel-coordination with a single supplier catering to a retailer facing stochastic demand for a perishable product with a fixed price, and showed that giving partial returns of unsold stock to the retailer is the optimal policy for the entire supply chain. The result thus begs the question as to why manufacturers of perishable commodities widely accept full returns of unsold stock as the norm. We model the environment as one where two capacity-constrained manufacturers compete for shelf space with the same retailer, and show that a complete-credit returns policy is in fact the only possible equilibrium of the game. Our results obviate the need for knowing the exact functional form of the demand distribution in order to compute the returns credit, as Pasternack’s results would require. From a retailer’s standpoint, we establish a simple procurement strategy and show that it is optimal. The same game with price-only contracting has a pure-strategy equilibrium when the supplier capacities are below a threshold value and a mixed-strategy equilibrium when the supplier capacities cross this threshold but are still so limited that no single supplier can with certainty supply all the quantity demanded.
Keywords: Channel coordination versus Channel competition, Newsvendor problem, Vertical control, Returns policies, Perishable goods, Procurement strategy
JEL Classification: M31, C70
Suggested Citation: Suggested Citation