Equilibrium return policies under manufacturer competition

We study return policies in the presence of supplier competition. Consider a supply chain consisting of a retailer and competing manufacturers. The retailer has a limited ordering capacity. The manufacturers compete for the retailer's orders by offering return policies. We show that in equilibrium, the manufacturers always offer full-credit return policies to the retailer. This result explains the inconsistency between the popular practice of full-credit returns and the theoretical argument that full-credit return policies are suboptimal. Compared with wholesale price contracts, return policies may cause fiercer competition between manufacturers and thus make the manufacturers worse off and the retailer better off. The manufacturers and the channel always benefit from an increase in the retailer's ordering capacity. However, the retailer's profit may decrease when its ordering capacity increases. Numerical studies reveal that when manufacturers can first commit to their contract types, wholesale price contracts can be their equilibrium choices when the retailer's ordering capacity is below a threshold; otherwise, full-credit return policies will be their unique equilibrium choice. This partially explains the coexistence of wholesale price contracts and return policies in practice.