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"Returns Policies for a Pessimistic Retailer"

David Glenn


First Author :

David Glenn
Business Administration
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820


Abstract :
Manufacturer buy-back policies are studied in the context of asymmetric demand information. A manufacturer offers a new product for sale to a retailer who makes a single stocking decision prior to the sales period. The two parties formulate different demand forecasts, either because they cannot share all relevent information or because the shared information lacks suffcient credibility. The manufacturer’s profit is, therefore, limited by the retailer’s forecast which is relatively pessimistic. Offering to buy-back unsold items can induce the retailer to order more while supporting higher wholesale prices. It can also signal credibility for the manufacturer’s optimistic forecast. Yet, the actual effect of buy-back depends on how the retailer regards the manufacturer’s information. This paper characterizes two extremes: the retailer either deems the manufacturer to be better informed or less informed about demand. Buy-back serves as a signaling mechanism on the one hand and as an inducement on the other.
Manuscript Received : 2004
Manuscript Published : 2004
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