Returns Policies Between Channel Partners for Durable Products With Used Goods Markets
66 Pages Posted: 30 Dec 2010 Last revised: 13 Dec 2011
Date Written: December 29, 2010
Many durable products with relatively short selling seasons have been using returns policies between manufacturers and retailers as the contractual protocol for quite some time. More recently, these sectors have witnessed the emergence of peer-to-peer (P2P) web-based used goods markets as important transaction channels between buyers and sellers. Given that these two issues are critically linked from both supply and demand perspectives, in this paper, we study what role the strength of the used goods market plays in shaping a manufacturer's incentive to offer a returns policy option to a retailer. We do so through a two-period dyadic channel framework where the retailer faces uncertain demand for a durable product from a renewable set of customers and the manufacturer needs to decide whether or not to offer a returns contract to the retailer. Analyzing the resulting game for customers who do not consider a wait-and-buy option, we first characterize the necessary and sufficient condition under which a returns contract is the equilibrium contracting strategy as well as the corresponding channel decisions and profits. Further analysis of this condition reveals that a stronger used goods market generally increases the likelihood of a returns policy contract to be the equilibrium strategy. Indeed, this result seems to be quite robust to modeling assumptions. However, it contradicts the burgeoning managerial trend to replace such contracts with price-only ones for products with strong used goods markets. We also discuss how used goods markets affect the equilibrium channel decisions as well as how demand uncertainty and logistics costs associated with returns influence the equilibrium contracting strategy. Finally, we extend our model framework to include forward-looking customers, i.e., customers who take into account the wait-and-buy option, and show that the viability of a returns policy is negatively impacted by such behavior.
Keywords: returns policy, used goods markets, forward-looking consumers, uncertain demand, decentralized channel, durable products
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