Money-back guarantee and personalized pricing in a Stackelberg manufacturer's dual-channel supply chain

Abstract

We examine customer returns and pricing strategies in a manufacturer's Stackelberg supply chain using game-theoretic models. In the supply chain, the manufacturer sells a high-quality product through an independent retailer, and considers whether or not to open a direct channel to sell a similar but lower-quality product. We discuss how the retailer and the manufacturer with a direct channel should choose their customer returns and pricing strategies. We show that when the retailer implements a personalized pricing strategy (PPS), the addition of the direct channel benefits the manufacturer but always makes the retailer worse off, and this differs from the case when the retailer adopts a uniform pricing strategy. We find that if its net salvage value of the product is positive, the retailer should offer a Money-Back Guarantee (MBG) and implement PPS. In the direct channel, however, the manufacturer may offer an MBG even if the net salvage value is negative, and may implement PPS only if customer satisfaction in the direct channel is low. Under certain conditions, a win-win may result from both the retailer's adoption of MBG and PPS and the manufacturer's adoption of MBG in its direct channel, while the adoption of PPS by the manufacturer in its direct channel may lead to lose-lose for the retailer and the manufacturer. The implications of customer returns and pricing strategies, as well as the impact of these two strategies on prices, demands, and profits, are discussed.