Return policy and supply chain coordination with network-externality effect

The benefits of a consumer return policy have been extensively studied in extent literature. This paper explores the potentially damaging impact of a return policy on the retailer. We develop an analytical framework and examine the economic impact of consumer return among consumers, retailer and supply chain. We distinguish three network-externality (NE) cases: no network externality, fixed network-externality and variable network-externality contingent on return amount to discuss the retailer’s selling price, refund and inventory policies. Our analysis derives the optimal policies and shows that they take the form of contingence model in which the policies depend on consumer initial return and NE return. We also examine the influence of the consumer return NE effect on buy-back contracts of the supply chain and show that while the traditional buy-back contract fails to coordinate the supply chain, the NE effect does not render the differentiated buy-back contract less effective. Finally, we extend our study to a heterogeneous consumer case.