Returns with wholesale-price-discount contract in a newsvendor problem

We consider a newsvendor problem in a supply chain that consists of a manufacturer and a retailer. The manufacturer is the Stackelberg leader and the retailer is the follower. We examine how the manufacturer can contract a wholesale-price-only agreement with its retailer that maximizes its profit. We also propose a returns policy with a wholesale-price-discount scheme (returns-discount contract) that can achieve supply chain coordination. Using the wholesale price only contract as a benchmark, we show how the manufacturer sets a discounted wholesale price in a returns-discount contract that enhances both profits of the manufacturer and the retailer, as well as improves the supply chain efficiency.