Optimal policies for recovering the value of consumer returns

Keith J. Crocker, Paolo Letizia

Research output: Contribution to journalArticlepeer-review

21 Scopus citations

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 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 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.

Original languageEnglish (US)
Pages (from-to)1667-1680
Number of pages14
JournalProduction and Operations Management
Volume23
Issue number10
DOIs
StatePublished - Oct 1 2014

All Science Journal Classification (ASJC) codes

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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