On the effectiveness of returns policies in the price-dependent newsvendor model

We study in this paper the price-dependent (PD) newsvendor model in which a manufacturer sells a product to an independent retailer facing uncertain demand and the retail price is endogenously determined by the retailer. We prove that for a zero salvage value and some expected demand functions, in equilibrium, the manufacturer may elect not to introduce buybacks. On the other hand, if buybacks are introduced in equilibrium, their introduction has an insignificant effect on channel efficiency improvement, but, by contrast, may significantly shift profits from the retailer to the manufacturer. We further demonstrate that the introduction of buybacks increases the wholesale price, retail price, and inventory level, as compared to the wholesale price-only contract, and that the corresponding vertically integrated firm offers the lowest retail price and highest inventory level. (C) 2005 Wiley Periodicals, Inc.