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Inventories, Manufacturer Returns Policies, and Equilibrium Price Dispersion under Demand Uncertainty

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  • Howard P. Marvel
  • Hao Wang

Abstract

Returns policies can prevent a manufacturer's product from being discounted. Such discounting discourages inventory holdings, and can deny adequate retail representation to products with uncertain demand. We demonstrate that returns are not simply a substitute for resale price maintenance, but can instead be employed to support a desirable degree of price dispersion at retail. Surprisingly, optimal return policies depend only on market demand functions and marginal production costs. The manufacturer need not know the distribution of demand uncertainty for its product, but can instead rely on retailers to order appropriately. Our results generalize to oligopoly settings.

Suggested Citation

  • Howard P. Marvel & Hao Wang, 2007. "Inventories, Manufacturer Returns Policies, and Equilibrium Price Dispersion under Demand Uncertainty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(4), pages 1031-1051, December.
    • Handle: RePEc:bla:jemstr:v:16:y:2007:i:4:p:1031-1051
    DOI: 10.1111/j.1530-9134.2007.00166.x
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    References listed on IDEAS

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    1. Kandel, Eugene, 1996. "The Right to Return," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 329-356, April.
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    4. repec:bla:jindec:v:49:y:2001:i:3:p:223-45 is not listed on IDEAS
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    Cited by:

    1. Tatsuhiko Nariu & David Flath & Atsuo Utaka, 2012. "Returns System With Rebates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1243-1256, November.
    2. Mehmet Gümüş & Saibal Ray & Shuya Yin, 2013. "Returns Policies Between Channel Partners for Durable Products," Marketing Science, INFORMS, vol. 32(4), pages 622-643, July.
    3. João Montez, 2015. "Controlling opportunism in vertical contracting when production precedes sales," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 650-670, September.
    4. Anna G. Devlin & Wedad Elmaghraby & Rebecca W. Hamilton, 2018. "Why do suppliers choose wholesale price contracts? End-of-season payments disincentivize retailer marketing effort," Journal of the Academy of Marketing Science, Springer, vol. 46(2), pages 212-233, March.
    5. Fernandes, Rui & Gouveia, Borges & Pinho, Carlos, 2010. "Modeling Overstock," MPRA Paper 25126, University Library of Munich, Germany.
    6. Marvel, Howard P. & Wang, Hao, 2009. "Distribution contracts to support optimal inventory holdings under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 27(5), pages 625-631, September.
    7. Shailender Singh & Chen Guan-Ru, 2020. "Modeling variations in price inertia under demand uncertainty," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 19(1), pages 26-42, February.
    8. Matsui, Kenji, 2010. "Returns policy, new model introduction, and consumer welfare," International Journal of Production Economics, Elsevier, vol. 124(2), pages 299-309, April.

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