Information strategy in a supply chain under asymmetric customer returns information

Abstract We develop a model for a supply chain with a manufacturer and a retailer facing customer returns, in which information about the rate of customer returns is obtained and held asymmetrically. The retailer implements a full refund policy and accepts returns, collecting and retaining data on the rate of returns. The manufacturer is uninformed about the returns rate. The manufacturer has four strategies as to returns rate information: not acquiring the information, acquiring the information through a side payment contract, offering a buyback policy in order to participate in the returns process, or encroaching with a direct channel. We identify the manufacturer’s optimal information strategy and discuss the retailer’s preferences. We also identify win–win outcomes for the manufacturer and the retailer. We find that a buyback policy helps the manufacturer to obtain returns rate information for free when the salvage value is the same for the manufacturer and the retailer. When the manufacturer’s salvage value is relatively low, there always exists a region where the manufacturer does not try to acquire the information. The retailer may benefit from the cases in which the manufacturer does not acquire the information, adopts a side payment contract, or institutes a buyback policy, but the retailer is always worse off from the manufacturer’s channel encroachment strategy. Both the manufacturer and the retailer may have consistent preferences as to the manufacturer’s strategy.