Returns Policies between Channel Partners for Durable Products

Posted: 13 Nov 2013

See all articles by M. Gumus

M. Gumus

McGill University - Desautels Faculty of Management

Saibal Ray

McGill University - Desautels Faculty of Management

Shuya Yin

Independent

Abstract

Many durable products with relatively short selling seasons have been using returns policies between manufacturers and retailers as the contractual protocol for some time. Recently, these sectors have witnessed the growing popularity of peer-to-peer 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 the role that consumer valuation of used products plays in shaping a manufacturer's incentive to offer a returns policy option to a retailer when used goods might be devalued compared to new ones as a result of physical deterioration (or obsolescence). 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 who are impatient but forward looking. The manufacturer, on the other hand, needs to decide whether or not to offer a returns contract to the retailer. We first characterize the necessary and sufficient condition under which a returns contract is the equilibrium strategy as well as the corresponding channel decisions. Further analysis of this condition reveals that a higher consumer valuation of used products increases the likelihood of a returns contract being the equilibrium strategy. This result seems to be robust except when the potential demands for the two periods are quite deterministic and uncorrelated. However, it contradicts the burgeoning managerial trend to replace returns contracts with price-only ones in sectors where used goods are valued relatively highly by the consumers. 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.

Keywords: returns policy, used goods, stochastic demand, decentralized channel, demand correlation

Suggested Citation

Gumus, Mehmet and Ray, Saibal and Yin, Shuya, Returns Policies between Channel Partners for Durable Products. Marketing Science, Vol. 32, No. 4, 2013; pp. 622-643; DOI: 10.1287/mksc.2013.0784. Available at SSRN: https://ssrn.com/abstract=2329503

Mehmet Gumus (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Saibal Ray

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. (W)
Montreal, Quebec H3A 2M1
Canada

HOME PAGE: http://people.mcgill.ca/saibal.ray/

Shuya Yin

Independent ( email )

No Address Available

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