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Optimal Returns Policy under Demand Uncertainty

Author

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  • Gurnani, Haresh
  • Sharma, Arun
  • Grewal, Dhruv

Abstract

Multiple categories of retail products suffer limited shelf life, demand uncertainty, and, in some cases, long lead times. To provide retailers with an incentive to increase the stocking quantity of such products, manufacturers may offer an option to return unsold items at wholesale or less than wholesale prices. This article extends the additive price-dependent demand model in three ways. First, partial returns are optimal for the manufacturer but do not induce higher stocking quantities compared with when the manufacturer offers no returns. Second, in terms of the effect of investment in demand-enhancing activities, when retailers invest, they set higher resale prices, but an optimal partial returns policy still does not induce higher stocking quantity, whereas when manufacturers invest, the optimal returns policy induces higher stocking quantity. Third, when the manufacturer and retailer have different expectations of demand uncertainty, the retailer's estimate influences the expected profits for both, whereas the manufacturer's estimate has a major impact on its profits only.

Suggested Citation

  • Gurnani, Haresh & Sharma, Arun & Grewal, Dhruv, 2010. "Optimal Returns Policy under Demand Uncertainty," Journal of Retailing, Elsevier, vol. 86(2), pages 137-147.
  • Handle: RePEc:eee:jouret:v:86:y:2010:i:2:p:137-147
    DOI: 10.1016/j.jretai.2010.02.001
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:joreco:v:39:y:2017:i:c:p:182-189 is not listed on IDEAS
    2. M. Ali Ülkü & Lynn C. Dailey & H. Müge Yayla-Küllü, 2013. "Serving Fraudulent Consumers? The Impact of Return Policies on Retailer's Profitability," Service Science, INFORMS, vol. 5(4), pages 296-309, December.
    3. Joon Yong Seo & Sukki Yoon & Milena Vangelova, 2016. "Shopping plans, buying motivations, and return policies: impacts on product returns and purchase likelihoods," Marketing Letters, Springer, vol. 27(4), pages 645-659, December.
    4. Ohmura, Shota & Matsuo, Hirofumi, 2016. "The effect of risk aversion on distribution channel contracts: Implications for return policies," International Journal of Production Economics, Elsevier, vol. 176(C), pages 29-40.
    5. repec:eee:jouret:v:88:y:2012:i:4:p:528-541 is not listed on IDEAS
    6. repec:eee:jouret:v:91:y:2015:i:4:p:586-609 is not listed on IDEAS

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