Impacts of returns policy under supplier encroachment with risk-averse retailer

This paper investigates the effects of consumer returns policy and retailer’s risk aversion on the behavior of supply chain members under supplier encroachment. We build a theoretical model of a dual-channel supply chain consisting of a risk-neutral supplier and a risk-averse retailer. Both channels provide consumer returns service. We thus examine the optimal pricing decisions for the supplier and the retailer and analyze the impacts of consumers’ sensitivity to returns policy on firms’ pricing strategies, product demands and the performance under retailer’s different risk attitudes. We also consider the role of competition when consumers facing multiple suppliers or multiple retailers. It is shown that when consumers are too sensitive to the returns policy, providing consumer returns policy may hurt the online demand and the total demand. An increased risk aversion level of retailer may lead to a smaller expect utility for the retailer while a larger profit for the supplier. Surprisingly, the number of retailers does not affect the optimal decisions, only affects the competitive retailers’ expected utility. Furthermore, we find that a two-part tariff contract could coordinate the supply chain under the supplier encroachment when both members are risk-neutral.