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.