Who should be pricing leader in the presence of customer returns?

We examine how competing retailers should choose product returns strategies and leadership strategies, and how product returns strategies and leadership strategies impact the prices, market shares, and profits of each retailer in a duopoly. We find that if the transferring costs of a returned product can be offset by its salvage value, the retailer, whether of high or low quality, should offer a Money-Back Guarantee (MBG) returns policy. We also show that the leadership strategy in a duopoly setting depends on the retailer's efficiency in selling the product (quality and acquisition cost) and handling customer returns (if an MBG is offered), relative to the competing retailer. We find that both retailers will choose sequential games and we identify when a retailer will be a pricing leader or follower in a competitive market. We identify the globally optimal leadership strategy for the duopoly when a retailer's efficiency in selling the product and handling customer returns is comparable to that of the competing retailer. In addition, we show that a retailer's MBG returns policy has a significant effect on the leadership strategy in duopoly competition. Numerical examples are also included to illustrate the major results.