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Returns System with Rebates

Author

Listed:
  • Tatsuhiko Nariu
  • David Flath
  • Atsuo Utaka

Abstract

The demand for goods like seasonal fashion apparel is uncertain but the lead time needed for production is long, and so it is necessary to set the production quantity before the demand is fully known. Once sale begins, if demand is less than anticipated, the price will be low. In a futile attempt to avoid losses themselves, a competitive retail industry selling such merchandise will order too little, which will diminish the producer profit. A returns system is one response but it has problems also. Under a returns system in which retailers are fully reimbursed by the producer for any unsold merchandise, retailers will set their order quantities at the highest level allowed, which is also sub-optimal. So what to do? A slightly more sophisticated returns system is the answer. We show that a returns system with rebates implements the optimal production and sales strategy, attaining maximum expected profit in the channel.

Suggested Citation

  • Tatsuhiko Nariu & David Flath & Atsuo Utaka, 2009. "Returns System with Rebates," ISER Discussion Paper 0744, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:0744
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    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2009/DP0744.pdf
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    Other versions of this item:

    • 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.

    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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