A game theoretic approach for pricing under a return policy and a money back guarantee in a closed loop supply chain

Abstract

Closed Loop Supply Chain (CLSC) has attracted the attention of many researchers in recent years. This paper introduces for the first time a CLSC consisting of one manufacturer and two retailers in which sold items can be returned from customers in the two categories of non-defective and defective items. The first retailer exercises a Money Back Guarantee (MBG) policy for defective items with a full refund. He also offers an MBG with a partial refund for non-defective items. The manufacturer collects the defective items returned to remanufacture and sell them to a second retailer. The first retailer sells non-defective items returned as open box items at a discount in a second market while the second retailer sells remanufactured items in a third market. Two scenarios are also considered: one in which the manufacturer pays to the first retailer the wholesale price for defective items, and the other in which the manufacturer pays the first retailer's price in order to motivate him to offer exercise the MBG policy for defective items. A numerical Example is finally introduced and the relevant parametric analysis is carried out while managerial insights are extracted from the solution. Results show that the first scenario is more beneficial to all the parties in the supply chain because it not only increases both the manufacturer's and the retailers' profits but also reduces the retailers' prices.