Incentives for Retailer Forecasting: Rebates vs. Returns

Terry A. Taylor () and Wenqiang Xiao ()
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Terry A. Taylor: Haas School of Business, University of California, Berkeley, Berkeley, California 94720
Wenqiang Xiao: Stern School of Business, New York University, New York, New York 10012

Management Science, 2009, vol. 55, issue 10, 1654-1669

Abstract: This paper studies a manufacturer that sells to a newsvendor retailer who can improve the quality of her demand information by exerting costly forecasting effort. In such a setting, contracts play two roles: providing incentives to influence the retailer's forecasting decision and eliciting information obtained by forecasting to inform production decisions. We focus on two forms of contracts that are widely used in such settings and are mirror images of one another: a rebates contract, which compensates the retailer for the units she sells to end consumers, and a returns contract, which compensates the retailer for the units that are unsold. We characterize the optimal rebates contracts and returns contracts. Under rebates, the retailer, manufacturer, and total system may benefit from the retailer having inferior forecasting technology; this never occurs under returns. Although one might conjecture that returns would be inferior because its provision of "insurance" would discourage the retailer from forecasting, we show that returns are superior.

Keywords: forecasting; supply chain contracting; rebates; returns; endogenous adverse selection (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (44)

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