Using Return Polices to Elicit Retailer Information

Anil Arya () and Brian Mittendorf ()
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Brian Mittendorf: Yale School of Management

RAND Journal of Economics, 2004, vol. 35, issue 3, 617-630

Abstract: We show that a manufacturer may prefer to offer a return policy when dealing with a retailer who holds advance knowledge about market conditions. Roughly stated, the manufacturer offers a liberal return allowance in lieu of a lower price to satisfy a retailer facing unfavorable market conditions. A retailer facing favorable conditions finds this tradeoff unattractive because he is likely to sell the merchandise anyway and thus not make as much use of the generous return terms. As a consequence, a retailer is less inclined to misstate market conditions. By serving as an additional control instrument, a returns policy reduces the manufacturer's need to ration (cut) production.

Date: 2004
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