Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2005/21:
Coordination of Limited Commercial Return
Jens Bengtsson ()
Abstract: This paper analyses coordination in a supply chain
consisting of a supplier and a retailer, where the retailer has the
opportunity to return products at midlife and end-of-life. The paper
examines particularly the coordination problem when the supplier has the
opportunity to realise a limited amount of overstock items at a higher
price than the retailer at midlife. In this paper return options are
introduced in the channel, where an option gives the holder the right to
return a product at midlife in exchange for a pre-specified amount of
money. It is shown that the supplier must, to achieve coordination,
determine one exercise price of the options and two return rebates, where
the latter guarantee the retailer an amount of money for each product
returned, at midlife and end-of-life, without a corresponding option.
Conditions for pricing of return options and conditions for wholesale
prices are derived as well. A numerical study shows that the supplier is
better off when the number of return options increases. The numerical study
also shows that the coordinating option price is relatively unaffected by
the return rebate in the second period, but is more dependent on the
exercise price and return rebate at midlife, which in turn are dependent on
the production costs.
Keywords: Commercial Return; supply chain; return options; (follow links to similar papers)
JEL-Codes: C51; (follow links to similar papers)
33 pages, December 22, 2005
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