Demand uncertainty and returns policies for a seasonal product: An alternative model

Abstract

Marvel and Peck [International Economic Review 36 (1995) 691-714] considered the following seasonal-product problem: A manufacturer sets wholesale price ($p w/unit) and return credit ($r/unit); the retailer then sets retailer price ($p R/unit) and order quantity (Q). How should the manufacturer set p w and r? Demand uncertainty consists of two components: "valuation" and "customers' arrivals". Our more realistic models reveal effects unobservable from Marvel-Peck's. E.g.: (i) Setting r > 0 benefits the manufacturer much more than the retailer, (ii) "Valuation" (but not "customer-arrival") uncertainty is imperative for the retailer; without it, the manufacturer can set p w and r such that he reaps most of the profits. © 2000 Elsevier Science B.V. All rights reserved.