How to Implement Return Policies in a Two-Echelon Supply Chain?

We integrate a retailer’s return policy and a supplier’s buyback policy within a modeling framework. In this setting, consumers decide whether to buy and then whether to return the product, the retailer sets the retail price, quantity, and refund price, and the supplier chooses the wholesale price and buyback price. Both the demand uncertainty and consumers’ valuation uncertainty are considered; consumers realize their valuations only after purchase. We discuss four scenarios for each party in the supply chain that may offer or not offer return policy. We characterize each party’s optimal decisions for all scenarios and we show that the supplier’s best choice is to provide buyback policy and the retailer’s optimal response is to set refund price to be the same as supplier’s buyback price.