Manufacturer's Returns Policies and Retail Competition

By I. PngV. Padmanabhan
1994| Working Paper No. 1294

Throughout the world, returns policies are widespread in distribution. They are usually justified as a way of insuring retailers against excess inventory. We demonstrate that returns policies can increase manufacturer profitability even in the absence of any insurance motivation. A returns policy enables a manufacturer to influence competition among downstream retailers. Specifically, when primary demand is uncertain, the policy leads to higher retail stocks, less retail price competition, and a higher wholesale price. If production costs are sufficiently low and primary demand uncertainty is not too large, a returns policy will raise the manufacturer’s profit.