Should a manufacturer sell refurbished returns on the secondary market to incentivize retailers to reduce consumer returns?

Abstract

Consumer electronics returns are typically returned by the retailer to the manufacturer for a full refund of the wholesale price. This practice does not suciently motivate the retailer to reduce the volume of returns. Dierent mechanisms have been proposed to incentivize the retailer to reduce returns, such as a reduced wholesale price for returns below a target, but they do not consider the subsequent disposition of returns. The high value of returns usually justies refurbishment and resale. We study how competition between refurbished returns sold by the manufacturer and new products sold at the retailer aects retailer behavior. We nd that the retailer never exerts more eort to reduce returns when faced with competition through the online store. The manufacturer's protability, however, is always higher with an online store. The online store is also preferable to a strategy where the manufacturer only partially refunds the retailer for returns.