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Do returns policies intensify retail competition?

Article Excerpt
The paper "Manufacturer's Returns Policies and Retail Competition" by Padmanabhan and Png (1997) argues that returns policies intensify retail competition and therefore raise the manufacturer's profits. They reach that result through a problematic method to solve the game. Particularly, in the game where the manufacturer accepts returns, they unreasonably assume the retailers would never face stock constraints, thus changing the retail competition from a Cournot-like competition to a Bertrand one. Actually, in a game where retailers first order stocks and then compete by choosing prices, even if a manufacturer offers full return policies, the retailers can still use "insufficient" stocks as quantities precommitment in order to uphold retail prices. Hence, the retailers still face stock constraints at the final stage of the game. The nature of the game is essentially unaffected by returns policies when demand is certain. This note shows that returns policies do not intensify retail competition in the model proposed by Padmanabhan and Png (1997).

Key words: returns policies, retail competition; demand uncertainty; pricing History: This paper was received March 6, 2002, and was with the author 1 month for 2 revisions.

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1. The Paper

In this note we will discuss the paper "Manufacturer's Returns Policies and Retail Competition" by Padmanabhan and Png (1997)--PP hereafter-published in Marketing Science. PP consider a market where a monopoly upstream manufacturer sells through one or two downstream retailers. The product has limited shelf life. The retailers face linear demand curves. On pages 83-84, the paper defines a three-stage game:

1. The manufacturer sets distribution policy, which includes a uniform wholesale price and possibly a returns policy; 2. Given the manufacturer's distribution policy, the retailer(s) decide how much stock to order; 3. With stocks in hand, the retailer(s) set prices to the final consumers.

The central points of the paper can be summarized as follows. It first considers a benchmark where there is a single retailer. It is shown...