The Right to Return: An Empirical Study

Abstract

This research investigates two key questions on manufacturer returns, or buy-back, in a manufacturer-retailer channel: (1) when should manufacturers offer buy-back to retailers and, (2) how manufacturers’ buy-back decisions influence their own- and the retailers’ marketing strategies. To do so, we first construct a decision process framework depicting the manufacturer and retailer in the manufacturer retailer channel, based upon which we generate a number of hypotheses regarding the antecedents and consequences of manufacturer returns. After that, we test the hypotheses using a system equation model proposed by Petersen and Kumar (2009). To ensure a robust conclusion, we conduct our empirical test on four diverse product categories sourced from a large retailer. Our empirical findings suggest that in reality, buy-back plays multiple critical roles for manufacturers, including risk-sharing, information sharing, and changing competition structure. Our results also show that the buy-back policy significantly affects the manufacturers’ and the retailer’s decisions on pricing and promotion. For example, in certain categories, buy-back helps prevent a manufacturer’s product from being discounted, suggesting that buy-back can serve as an alternative for resale price maintenance and channel coordination.