Optimal Policies for Recovering the Value of Consumer Returns



This paper characterizes an optimal returns policy between a manufacturer and a retailer who receives consumer returns. The manufacturer may take a costly hidden action that reduces the expected number of products returned by consumers, which when realized is hidden information known 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 as new. We find that the optimal returns policy entails a full refund by the manufacturer to the retailer of the wholesale price for any returns, as well as a bonus paid to the retailers that is decreasing in the number of returns to the manufacturer.
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Dr. F. Sting