Optimal Policies for Recovering the Value of Consumer Returns
Keith J. Crocker, Paolo Letizia
Production and Operations Management · 2014 · Volume 23 · Issue 10
Abstract
This study characterizes the class of Pareto optimal returns policies between a manufacturer and a retailer who receives consumer returns. The manufacturer may take a costlyhidden actionthat reduces the expected number of products returned by consumers, which when realized ishidden informationknown only to the retailer. When faced with consumer returns, the retailer must decide whether to send the product back to the manufacturer, who harvests a low salvage value, or to engage in costly refurbishment that permits the returned product to be resold to consumers. We find that the optimal returns policies may be implemented through the payment by the manufacturer of a full refund to the retailer of the wholesale price for any returns as well as a bonus paid to the retailer that is decreasing in the number of returns to the manufacturer.
Keywords
consumer returns, returns policy, preponement, hidden action, hidden information
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