Full Quantity or Full Credit? Choosing the Right Buyback Policy for a Behavioral Retailer

Yinghao Zhang (), Peiwen Yu () and Tianjun Feng ()
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Yinghao Zhang: Carl H. Lindner College of Business, University of Cincinnati, Cincinnati, Ohio 45221
Peiwen Yu: Research Center of Business Administration and Economic Development, School of Economics and Business Administration, Chongqing University, Chongqing 400044, China
Tianjun Feng: School of Management, Fudan University, Shanghai 200433, China

Manufacturing & Service Operations Management, 2024, vol. 26, issue 6, 2212-2230

Abstract: Problem definition : Despite extensive research on buyback contracts in supply chain management, little attention has been given to a direct comparison between a traditional full-quantity, partial-credit (FQ) buyback contract and an alternative full-credit, partial-quantity (FC) contract, especially when considering the behavioral biases of the retailer. This study aims to fill this research gap by exploring how these biases influence contract performance and offer practical guidelines for suppliers. Methodology/results : Through controlled laboratory experiments and structural model estimation, we show that the ordering decisions made by human retailers are jointly affected by three behavioral biases—loss aversion, prospective accounting, and psychological cost of inventory error—and these biases differ in magnitude between the two contracts. Incorporating these biases into a behavioral retailer’s utility function, we then analytically examine which buyback policy the supplier should choose. When the wholesale price is exogenously given, the supplier should adopt the FC contract for high-margin (low-cost) products. Conversely, when the supplier has the power to set both the wholesale and buyback prices, the FC contract is generally more beneficial for low-margin products. Finally, when the product cost is sufficiently high, a wholesale price contract may be advantageous over buyback policies. Managerial implications : The managerial implication of this paper is significant for suppliers who have to choose between different buyback policies. The paper suggests that the supplier should carefully consider not just the economic, but also the behavioral dimensions when making contract decisions, particularly when dealing with a retailer influenced by behavioral biases. Specifically, the choice between FQ and FC contracts is influenced by two key environmental factors: the production cost of the product and the nature of wholesale pricing. Understanding these elements allows suppliers to be flexible in contract choices and design appropriate return policies for their downstream supply chain partners.

Keywords: buyback contract; return policy; loss aversion; prospective accounting; psychological cost; behavioral operations (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:26:y:2024:i:6:p:2212-2230

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