Manufacturer's pricing strategy and return policy for a single-period commodity

Abstract

This paper presents a model for designing the pricing and return-credit strategy for a monopolistic manufacturer of single-period commodities. That is, given the unit manufacturing cost and the unit retail sale price, the manufacturer determines: (i) the unit price C to be charged against the retailer; and (ii) the unit credit V to be given to the retailer for units returned. While the manufacturer is allowed to set C and V, the order quantity Q is set by the retailer in response to the manufacturer's C and V. Among the unexpected findings derived from our model are: (i) unless an external force supports the retailer, otherwise the manufacturer can usually design a (C, V)-scheme that gives himself the lion's share of the profit; (ii) depending on the risk attitudes of the manufacturer and the retailer, the optimal return policy can range from 'no returns allowed' to 'unlimited returns with full credit'; (iii) instead of losing his profit share to the retailer, a return-credits agreement can often be manipulated by a shrewd manufacturer to increase his profit.