Do Returns Policies Intensify Retail Competition?

The paper “Manufacturer’s Returns Policies and Retail Competition” by Padmanabhan and Png (1997) argues that returns policies intensify retail competition and therefore raise the manufacturer’s profits. They reach that result through a problematic method to solve the game. Particularly, in the game where the manufacturer accepts returns, they unreasonably assume the retailers would never face stock constraints, thus changing the retail competition from a Cournot-like competition to a Bertrand one. Actually, in a game where retailers first order stocks and then compete by choosing prices, even if a manufacturer offers full return policies, the retailers can still use “insufficient” stocks as quantities precommitment in order to uphold retail prices. Hence, the retailers still face stock constraints at the final stage of the game. The nature of the game is essentially unaffected by returns policies when demand is certain. This note shows that returns policies do not intensify retail competition in the model proposed by Padmanabhan and Png (1997).