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The Right to Return

  • Kandel, Eugene

This article studies the allocation of responsibility for unsold inventory, provision for which is made in practically every distribution contract. The two extreme cases are the consignment contract, which allocates all the burden to the manufacturer, and the no-return contract, in which retailers purchase the merchandise outright and assume responsibility for unsold inventory. Contract choices are shown to vary across countries, industries, products and types of transactions. The article identifies six main factors affecting this choice: optimal inventory policy in a stochastic retail demand environment, relative advantage in disposing of the unsold inventory, optimal risk allocation, incentives to invest in promotions and provide services to increase consumer demand, information asymmetry, and costs associated with the consignment contract per se. Several testable implications are presented and the choice of contracts in the publishing industry is shown to be consistent with the predictions of the model. Copyright 1996 by the University of Chicago.

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File URL: http://dx.doi.org/10.1086/467351
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Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 39 (1996)
Issue (Month): 1 (April)
Pages: 329-56

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Handle: RePEc:ucp:jlawec:v:39:y:1996:i:1:p:329-56
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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  1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, March.
  2. Barry Alan Pasternack, 1985. "Optimal Pricing and Return Policies for Perishable Commodities," Marketing Science, INFORMS, vol. 4(2), pages 166-176.
  3. Russell Cooper & T.W. Ross, 1984. "Product Warranties and Double Moral Hazard," Cowles Foundation Discussion Papers 716, Cowles Foundation for Research in Economics, Yale University.
  4. James A. Kahn, 1992. "Why is Production More Volatile than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 481-510.
  5. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
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