Product Return Policies: The Impacts of Vertical Bargaining and Contracting with Retail Competition

Problem definition : Although many retailers allow consumer returns via money-back guarantees (MBGs) to stimulate consumer demand, some may choose not to. Most existing literature emphasizes factors from the marketing side. However, it is not uncommon that the returned products from unsatisfied consumers are further returned to the upstream manufacturer. How the upstream manufacturer–retailer interactions impact the downstream MBG policies is unclear. Methodology/results : We adopt a multiunit bilateral bargaining framework to model the firms’ interactions in distribution channels consisting of a manufacturer and two competing retailers. Interestingly, we find that both bargaining power and contract forms play important roles in determining equilibrium MBG decisions. When both retailers possess the same bargaining power, both retailers offering MBGs arises in equilibrium under the wholesale price contract, whereas the equilibrium MBG decisions depend on the bargaining power under the two-part tariff contract. Particularly, when the manufacturer is relatively weak in the negotiation with retailers, only one channel provides MBGs. When the retailers possess different bargaining powers, regardless of the contract forms, the asymmetric MBG decisions arise when one retailer is significantly more powerful in negotiation with the manufacturer than the other. The channel associated with the retailer with lower bargaining power provides an MBG, whereas the other may not. We further extend our analysis to situations where retailers can salvage the returned products with positive values by themselves, and the manufacturer negotiates with retailers sequentially to confirm our main findings. Managerial implications : Our results suggest that manufacturers should carefully develop product return policies when trading with symmetric retailers under coordinating contracts or asymmetric retailers with imbalanced power distribution.