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Inventories, Manufacturer Returns Policies, and Equilibrium Price Dispersion under Demand Uncertainty
Author(s) -
Marvel Howard P.,
Wang Hao
Publication year - 2007
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2007.00166.x
Subject(s) - microeconomics , oligopoly , discounting , economics , order (exchange) , product (mathematics) , price dispersion , production (economics) , marginal cost , distribution (mathematics) , marginal product , industrial organization , business , mathematical analysis , geometry , mathematics , finance , cournot competition
Returns policies can prevent a manufacturer's product from being discounted. Such discounting discourages inventory holdings, and can deny adequate retail representation to products with uncertain demand. We demonstrate that returns are not simply a substitute for resale price maintenance, but can instead be employed to support a desirable degree of price dispersion at retail. Surprisingly, optimal return policies depend only on market demand functions and marginal production costs. The manufacturer need not know the distribution of demand uncertainty for its product, but can instead rely on retailers to order appropriately. Our results generalize to oligopoly settings.