Optimal Returns Policy under Demand Uncertainty

Haresh Gurnani, Arun Sharma, Dhruv Grewal

Research output: Contribution to journalArticlepeer-review

22 Scopus citations

Abstract

Multiple categories of retail products suffer limited shelf life, demand uncertainty, and, in some cases, long lead times. To provide retailers with an incentive to increase the stocking quantity of such products, manufacturers may offer an option to return unsold items at wholesale or less than wholesale prices. This article extends the additive price-dependent demand model in three ways. First, partial returns are optimal for the manufacturer but do not induce higher stocking quantities compared with when the manufacturer offers no returns. Second, in terms of the effect of investment in demand-enhancing activities, when retailers invest, they set higher resale prices, but an optimal partial returns policy still does not induce higher stocking quantity, whereas when manufacturers invest, the optimal returns policy induces higher stocking quantity. Third, when the manufacturer and retailer have different expectations of demand uncertainty, the retailer's estimate influences the expected profits for both, whereas the manufacturer's estimate has a major impact on its profits only.

Original languageEnglish (US)
Pages (from-to)137-147
Number of pages11
JournalJournal of Retailing
Volume86
Issue number2
DOIs
StatePublished - Jun 1 2010

Keywords

  • Pricing
  • Quality/brand building investment
  • Retailing
  • Returns
  • Selling effort

ASJC Scopus subject areas

  • Marketing

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