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Coordination of Limited Commercial Return

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  • Bengtsson, Jens

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

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    Abstract

    This paper analyses coordination in a supply chain consisting of a supplier and a retailer, where the retailer has the opportunity to return products at midlife and end-of-life. The paper examines particularly the coordination problem when the supplier has the opportunity to realise a limited amount of overstock items at a higher price than the retailer at midlife. In this paper return options are introduced in the channel, where an option gives the holder the right to return a product at midlife in exchange for a pre-specified amount of money. It is shown that the supplier must, to achieve coordination, determine one exercise price of the options and two return rebates, where the latter guarantee the retailer an amount of money for each product returned, at midlife and end-of-life, without a corresponding option. Conditions for pricing of return options and conditions for wholesale prices are derived as well. A numerical study shows that the supplier is better off when the number of return options increases. The numerical study also shows that the coordinating option price is relatively unaffected by the return rebate in the second period, but is more dependent on the exercise price and return rebate at midlife, which in turn are dependent on the production costs.

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    Bibliographic Info

    Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2005/21.

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    Length: 33 pages
    Date of creation: 22 Dec 2005
    Date of revision:
    Handle: RePEc:hhs:nhhfms:2005_021

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    Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
    Phone: +47 55 95 92 93
    Fax: +47 55 95 96 50
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    Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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    Related research

    Keywords: Commercial Return; supply chain; return options;

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    References

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    1. Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
    2. Barry Alan Pasternack, 1985. "Optimal Pricing and Return Policies for Perishable Commodities," Marketing Science, INFORMS, vol. 4(2), pages 166-176.
    3. Kandel, Eugene, 1996. "The Right to Return," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 329-56, April.
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