Returns System with Rebates

ISER Discussion Paper No. 744

26 Pages Posted: 22 Jun 2009

See all articles by Tatsuhiko Nariu

Tatsuhiko Nariu

Kyoto University - Graduate School of Business and Administration

David Flath

Ritsumeikan University - Faculty of Economics

Atsuo Utaka

Kyoto University

Institute of Social and Economic Research

Osaka University - Institute of Social and Economic Research (ISER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2009

Abstract

The demand for goods like seasonal fashion apparel is uncertain but the lead time needed for production is long, and so it is necessary to set the production quantity before the demand is fully known. Once sale begins, if demand is less than anticipated, the price will be low. In a futile attempt to avoid losses themselves, a competitive retail industry selling such merchandise will order too little, which will diminish the producer profit. A returns system is one response but it has problems also. Under a returns system in which retailers are fully reimbursed by the producer for any unsold merchandise, retailers will set their order quantities at the highest level allowed, which is also sub-optimal. So what to do? A slightly more sophisticated returns system is the answer. We show that a returns system with rebates implements the optimal production and sales strategy, attaining maximum expected profit in the channel.

JEL Classification: D42, L42

Suggested Citation

Nariu, Tatsuhiko and Flath, David J. and Utaka, Atsuo and Economic Research, Institute of Social and, Returns System with Rebates (June 18, 2009). ISER Discussion Paper No. 744, Available at SSRN: https://ssrn.com/abstract=1421600 or http://dx.doi.org/10.2139/ssrn.1421600

Tatsuhiko Nariu

Kyoto University - Graduate School of Business and Administration ( email )

Kyoto, 606-8501
Japan

David J. Flath

Ritsumeikan University - Faculty of Economics ( email )

1-1-1 Noji-Higashi
Kusatsu, Shiga 525-8577, Siga 525-8577
Japan

Atsuo Utaka

Kyoto University ( email )

Japan

Institute of Social and Economic Research (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER)

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan
81-6-6879-8555 (Phone)
81-6-6879-8583 (Fax)

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