Returns with wholesale-price-discount contract in a newsvendor problem

We consider a newsvendor problem in a supply chain that consists of a manufacturer and a retailer. The manufacturer is the Stackelberg leader and the retailer is the follower.We examine how themanufacturer can contract awholesale-price-only agreementwith its retailer thatmaximizes its profit.We also propose a returns policy with a wholesale-price-discount scheme (returns-discount contract) that can achieve supply chain coordination. Using the wholesale price only contract as a benchmark, we show how the manufacturer sets a discountedwholesale price in a returns-discount contract that enhances both profits of the manufacturer and the retailer, as well as improves the supply chain efficiency. & 2010 Elsevier B.V. All rights reserved.