The impact of customer returns on competing chains

Abstract

Returning products by customers is a common phenomenon and is a concern of many industries, especially the retailing industry. We investigate decisions on prices and production quantities for two supply chains competing in a common market facing customer returns and examine the impact of customer returns on the profitability of two chains under two common competition games: Bertrand-Nash and Stackelberg. By assuming that two chains face two forms of customer returns that are proportional to sales and that increase with the retail price, we compare the distinct impacts of the two forms of customer returns on pricing and production quantity decisions under two competition games. We show that customer returns in one chain affect the decisions of not only this chain but also its competitor’s chain, and that two chains have different responses to different forms of customer returns. We also find that under some circumstances, offering a full refund customer returns policy is a better choice as compared to not allowing customer returns. We illustrate these results with numerical examples.

Keywords:

• chain-to-chain competition
• customer returns
• pricing
• game theory