Return Window Decision in A Distribution Channel

Abstract

This study investigates a firm's return window decision in a distribution channel. Conventional wisdom posits that compared to a centralized channel, a decentralized channel induces worse services (e.g., a shorter return window) because of double marginalization. We build a model consisting of one manufacturer, one retailer, and consumers who are heterogeneous in their willingness‐to‐pay (WTP) for product quality. Counterintuitively, we find that the return window can be longer in a decentralized channel than in a centralized channel. Furthermore, the return window can decrease along with product quality, which means that high‐quality products can be offered shorter return windows than low‐quality products. When endogenizing product quality, we reveal, contrary to previous findings, that the product quality in a decentralized channel may be higher, even when consumer heterogeneity in product quality follows a uniform distribution. This higher product quality induces a decentralized channel to generate a consumer surplus higher than that of a centralized channel.