Money-Back Guarantees in Distribution Channels: The Role of Multilateral Bargaining

Abstract

Allowing consumer returns via money-back guarantees (MBGs) is a common practice among retailers to encourage consumer purchases. Although the existing literature emphasizes the usefulness of MBGs, little is known about why retailers adopt different return policies and how their bargaining power with the upstream manufacturer impacts their return policies. To gain a better understanding, we examine retailers' MBG decisions with a stylized model. In our model, two retailers with different quality levels first decide whether to implement MBGs, then simultaneously bargain for wholesale prices with a manufacturer, and finally engage in price competition in the retail market. We adopt a multilateral bargaining framework, and we characterize sufficient conditions and explain the economic rationales for all possible equilibrium MBG outcomes. We further study the impact of the retailers' bargaining power on the manufacturer's and retailers' profits, as well as consumer surplus. We find that the retailers' (a)symmetric bargaining powers can lead to (a)symmetric MBG decisions and that the retailer with high bargaining power may refuse to implement an MBG if the manufacturer's reimbursement for the returned product is not large enough. Furthermore, while the manufacturer, the low-quality retailer, and the consumers always benefit from an MBG, the high-quality retailer benefits from an MBG only when his bargaining power is high and the low-quality retailer's bargaining power is low.