Using Return Polices to Elicit Retailer Information
Volume: Volume 35, No. 3
Issue: Autumn 2004
Pages: 617-630
Authors: Anil Arya and Brian Mittendorf
Title: Using Return Polices to Elicit Retailer Information
Abstract: We show that a manufacturer may prefer to offer a return policy when dealing with a retailer who holds advance knowledge about market conditions. Roughly stated, the manufacturer offers a liberal return allowance in lieu of a lower price to satisfy a retailer facing unfavorable market conditions. A retailer facing favorable conditions finds this tradeoff unattractive because he is likely to sell the merchandise anyway and thus not make as much use of the generous return terms. As a consequence, a retailer is less inclined to misstate market conditions. By serving as an additional control instrument, a returns policy reduces the manufacturer's need to ration (cut) production.