Consumer returns in a decentralized supply chain

Consumer returns tend to be ignored when managers make ordering and pricing decisions. How does accounting for this growing factor affect ordering quantities, profits and supply chain coordination? We model and analyze both a wholesale-price contract and a buy-back contract between a manufacturer and retailer facing stochastic demand and an exogenously given retail price. The results of extensive computational testing are counterintuitive: (1) higher profits and better coordination are achieved when buyer and vendor acting in a decentralized fashion do not consider any information about consumer returns; (2) retailer, manufacturer and supply chain profits increase as the retailer faces a larger share of the total logistics costs associated with consumer returns.