Who should be pricing leader in the presence of customer returns?

We examine how competing retailers should choose product returns strategies and leadership strategies, and how product returns strategies and leadership strategies impact the prices, market shares, and profits of each retailer in a duopoly. We find that if the transferring costs of a returned product can be offset by its salvage value, the retailer, whether of high or low quality, should offer a Money-Back Guarantee (MBG) returns policy. We also show that the leadership strategy in a duopoly setting depends on the retailer's efficiency in selling the product (quality and acquisition cost) and handling customer returns (if an MBG is offered), relative to the competing retailer. We find that both retailers will choose sequential games and we identify when a retailer will be a pricing leader or follower in a competitive market. We identify the globally optimal leadership strategy for the duopoly when a retailer's efficiency in selling the product and handling customer returns is comparable to that of the competing retailer. In addition, we show that a retailer's MBG returns policy has a significant effect on the leadership strategy in duopoly competition. Numerical examples are also included to illustrate the major results.

[1]  Yukihiro Nishimura,et al.  A note on equilibrium leadership in tax competition models , 2015 .

[2]  Tomohiro Inoue,et al.  Endogenous timing in a mixed duopoly: price competition with managerial delegation , 2009 .

[3]  Eitan Gerstner,et al.  Offering low price guarantees to improve customer retention , 2006 .

[4]  Jeffrey D. Shulman,et al.  Managing Consumer Returns in a Competitive Environment , 2011, Manag. Sci..

[5]  Bintong Chen,et al.  Compete in Price or Service?—A Study of Personalized Pricing and Money Back Guarantees , 2017 .

[6]  V. Kumar,et al.  Perceived Risk, Product Returns, and Optimal Resource Allocation: Evidence from a Field Experiment , 2015 .

[7]  E. Gal‐Or,et al.  First Mover and Second Mover Advantages , 1985 .

[8]  Scott M. Davis,et al.  Money back guarantees in retailing: matching products to consumer tastes , 1995 .

[9]  Yongjian Li,et al.  Consumer returns policies with endogenous deadline and supply chain coordination , 2015, Eur. J. Oper. Res..

[10]  Anna Stepanova,et al.  Second-mover advantage and price leadership in Bertrand duopoly , 2006, Games Econ. Behav..

[11]  K. Srinivasan,et al.  Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs , 1995 .

[12]  Walter Garcia-Fontes,et al.  Risk dominance selects the leader. An experimental analysis , 2000 .

[13]  Jens Hogreve,et al.  Understanding Money-Back Guarantees: Cognitive, Affective, and Behavioral Outcomes , 2011 .

[14]  Daisuke Hirata,et al.  Price leadership in a homogeneous product market , 2011 .

[15]  Xu Chen,et al.  The impact of customer returns in a supply chain with a common retailer , 2017, Eur. J. Oper. Res..

[16]  Jing Chen,et al.  When to introduce an online channel, and offer money back guarantees and personalized pricing? , 2017, Eur. J. Oper. Res..

[17]  Douglas J. Thomas,et al.  The Effect of Competition on the Efficient–Responsive Choice , 2014 .

[18]  Hubert Kempf,et al.  Endogenizing leadership in tax competition , 2010 .

[19]  Dan Zhang,et al.  Selling with Money-Back Guarantees: The Impact on Prices, Quantities, and Retail Profitability , 2013 .

[20]  R. Deneckere,et al.  A Model of Price Leadership Based on Consumer Loyalty , 1992 .

[21]  A. Coughlan,et al.  Used goods, not used bads: Profitable secondary market sales for a durable goods channel , 2007 .

[22]  James W. Friedman,et al.  Oligopoly and the theory of games , 1977 .

[23]  Bruce McWilliams,et al.  Money-Back Guarantees: Helping the Low-Quality Retailer , 2012, Manag. Sci..

[24]  J. Chen,et al.  Competing in a supply chain via full-refund and no-refund customer returns policies , 2013 .

[25]  Jerome B. Kernan,et al.  The many meanings (and implications) of "satisfaction guaranteed." , 1985 .

[26]  Lu Hsiao,et al.  Retailer's rationale to refuse consumer returns in supply chains , 2015 .

[27]  James H. Stock,et al.  Managing product returns for competitive advantage , 2006 .

[28]  Michael R. Hagerty,et al.  Return Policies and the Optimal Level of "Hassle" , 1998 .

[29]  R. Amir.  Endogenous Timing in Two-Player Games: A Counterexample , 1995 .

[30]  Michael Waterson,et al.  Identifying and characterising price leadership in British supermarkets , 2013 .

[31]  Jing Chen,et al.  The impact of customer returns on pricing and order decisions , 2009, Eur. J. Oper. Res..

[32]  Kenji Matsui,et al.  When should a manufacturer set its direct price and wholesale price in dual-channel supply chains? , 2017, Eur. J. Oper. Res..

[33]  Yulan Wang,et al.  Equilibrium pricing sequence in a co-opetitive supply chain with the ODM as a downstream rival of its OEM , 2015 .

[34]  Juan Carlos Bárcena-Ruiz.  Endogenous Timing in a Mixed Duopoly: Price Competition , 2007 .

[35]  Zsolt Katona,et al.  "Bricks and Clicks": The Impact of Product Returns on the Strategies of Multichannel Retailers , 2011, Mark. Sci..

[36]  Yongjian Li,et al.  The impact of consumer returns policies on consignment contracts with inventory control , 2014, Eur. J. Oper. Res..

[37]  Eric van Damme,et al.  Endogenous price leadership , 1998, Games Econ. Behav..

[38]  Ruud H. Teunter,et al.  Production , Manufacturing and Logistics The newsboy problem with resalable returns : A single period model and case study , 2005 .

[39]  Robert Forsythe,et al.  Selection Criteria in Coordination Games: Some Experimental Results , 1987 .

[40]  Marta E. Mangelsdorf.  How Secure Is the Internet , 2007 .

[41]  J.P.M. Hurkens,et al.  Endogenous Stackelberg leadership , 1999 .

[42]  S. Dowrick,et al.  von Stackelberg and Cournot duopoly: choosing roles , 1986 .

[43]  Wieland Müller,et al.  To Commit or Not to Commit: Endogenous Timing in Experimental Duopoly Markets , 2002, Games Econ. Behav..

[44]  David Zilberman,et al.  Demonstrations and money-back guarantees: market mechanisms to reduce uncertainty , 2001 .

[45]  Karsten Hansen,et al.  The Option Value of Returns: Theory and Empirical Evidence , 2009, Mark. Sci..

[46]  Ivan Pastine,et al.  Cost of delay and endogenous price leadership , 2004 .

[47]  Holly A. Syrdal,et al.  The Effect of Return Policy Leniency on Consumer Purchase and Return Decisions: A Meta-analytic Review , 2016 .

[48]  Rabah Amir,et al.  Stackelberg versus Cournot Equilibrium , 1999 .

[49]  Jonathan H. Hamilton,et al.  Endogenous timing in duopoly games: Stackelberg or cournot equilibria , 1990 .

[50]  Emmanuel Dechenaux,et al.  Price leadership and firm size asymmetry: an experimental analysis , 2009 .