The effect of risk aversion on distribution channel contracts: Implications for return policies

Shota Ohmura and Hirofumi Matsuo

International Journal of Production Economics, 2016, vol. 176, issue C, 29-40

Abstract: The return policy is often used in retailing supply chains. However, it is controversial in judging their practical value. In the literature, various theoretical and modeling explanations of why the return policy is used in practice and is preferred by the retailer and manufacturer have been put forth. The literature focusing on the channel agents’ risk attitudes to explain the adoption seems to have led to the conclusion that the two agents׳ preferences for adopting the full-return policy over the no-return policy are always in conflict, and thus the risk attitudes do not explain the adoption of return policy in practice. In this paper, we reinvestigate this issue. We first identify two distinct phases of risk averseness, high or low, for each of the two agents. We show distinct behaviors of how the wholesale price and order size are set in each phase. Then, we show that the full-return policy can be preferred over the no-return policy by both the agents if both of them are high risk averse. This implies that the agents’ risk attitudes can explain the adoption of return policy. This is a new theoretical result, which is contrary to the existing understanding in the literature. Our result highlights the importance and intricacy of channel policies especially when the risk attitudes of agents are considered.

Keywords: Supply chain contract; Risk aversion; Return policies (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0925527316000633
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:176:y:2016:i:c:p:29-40

DOI: 10.1016/j.ijpe.2016.02.019

Access Statistics for this article

International Journal of Production Economics is currently edited by Stefan Minner

More articles in International Journal of Production Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().