Optimal product quality and pricing strategy for a two-period closed-loop supply chain with retailer variable markup

Abstract

In this paper, we consider a two-period closed-loop supply chain which is comprised of a single manufacturer and a single retailer for trading a single product. At the retailer, the demand in the first period depends on the selling price, product quality and refund price, whereas in the second period, it depends on the selling price and the product quality. The retailer sets the selling prices with variable markups on the wholesale prices of the manufacturer and offers a return policy (immediate return and used product return) limited to the first period only. The immediate return is dependent on the refund price and the product quality, and the amount of returned used items is a fraction of the first period’s demand. The retailer sends the returned items to the manufacturer who reproduces/repairs those items and sells in the second period. We assume that the manufacturer acts as the Stackelberg leader and the retailer as the follower. We study the impacts of return policy, product quality and pricing strategy on the optimal decisions under two decision strategies (I and II). In the decision strategy I, both the players optimize their total profits over the entire selling season, whereas in the decision strategy II, they optimize each period’s profit sequentially. With the help of a numerical example we explore that the decision strategy I gives better result than the decision strategy II in terms of all decision variables except the product quality. We also investigate the effects of key model-parameters on the optimal decisions.