۱- Introduction

۲- Literature review

۳- Models

۴- Model analysis

۵- Extensions

۶- Conclusions

۷- Managerial implications and limitations

References

Abstract

This paper investigates the effects of consumer returns policy and retailer’s risk aversion on the behavior of supply chain members under supplier encroachment. We build a theoretical model of a dual-channel supply chain consisting of a risk-neutral supplier and a risk-averse retailer. Both channels provide consumer returns service. We thus examine the optimal pricing decisions for the supplier and the retailer and analyze the impacts of consumers’ sensitivity to returns policy on firms’ pricing strategies, product demands and the performance under retailer’s different risk attitudes. We also consider the role of competition when consumers facing multiple suppliers or multiple retailers. It is shown that when consumers are too sensitive to the returns policy, providing consumer returns policy may hurt the online demand and the total demand. An increased risk aversion level of retailer may lead to a smaller expect utility for the retailer while a larger profit for the supplier. Surprisingly, the number of retailers does not affect the optimal decisions, only affects the competitive retailers’ expected utility. Furthermore, we find that a two-part tariff contract could coordinate the supply chain under the supplier encroachment when both members are risk-neutral.

Introduction

When the upstream supplier in a supply chain sells products directly to consumers in the Internet, encroachment occurs in the downstream market which is called as supplier encroachment (Arya et al., 2007; Li et al., 2014; Ha et al., 2016). For example, cosmetics suppliers such as Estée Lauder and Johnson & Johnson sell their products through the traditional retail channel as well as their own websites; fashion industry makers such as Nike, Adidas and Levi Strauss and Co. (Levi’s) also sell products through independent retailers as well as their own Internet channels. Samsung and Sony in electronics industry, they all have their own direct channels and traditional reselling channels. In response to intensive competition in the online and offline environments (dualchannel supply chain) (Yan and Bhatnagar, 2008), the importance of services in a competitive dual-channel market is well emphasized (Yan and Pei, 2009), where consumer returns policy as a service guarantee tool has been widely implemented by firms (Heiman et al., 2001). Consumer returns policy helps retailers attract consumers and keep consumers loyalty. Especially, for the suppliers, providing consumer returns policy can alleviate the concerns for the misfits of online products. For example, retailers such as Wal-Mart and Sephora provide 100% money-back guarantees for consumer returns in their traditional channels. As their suppliers, Samsung and Estée Lauder also promise full returns policies in their online sales for Internet transactions.