The impact of return policy to retailers has been growing. In today’s consumer trends, consumers can return the product as long as they are not satisfied, so that the retailer was forced to face the high return cost and the huge losses caused by the consumer’s return uncertainty. Therefore, how to strike a balance between generous return policy and maximizing profits is a big problem to retailers.
In the past, the cooperation between manufacturers and retailers were usually by the traditional wholesale price contract. And now, the cooperation between them has many ways, revenue sharing contract is one of them. In the revenue sharing contract, only the retail price determined by the retailer, and the retailer and the manufacturer agree on a revenue sharing rate to share retailer’s revenue. This contract has been in practice by many company, therefore, this study constructed a model of game theory to explore how two different contracts affect retailer''s return policy.
The study concluded that (1) regardless of what kind of contracts, the product quality have a positive effect and the residual of the product have a negative effect to the generosity to retailer’s return policy. However, the “fit or not fit” probability and the magnitude of utility’s impairment about the product felt by consumers have the different effect in the two different contracts. (2) In the revenue sharing contract, if the “fit or not fit” probability is high, the retailer’s revenue sharing rate has a positive effect to the generosity to retailer’s return policy. On the contrary, if the “fit or not fit” probability is low, the retailer’s revenue sharing rate at first has a positive effect, and then have a negative effect to the generosity of retailer’s return policy. (3) Besides, the study also found that when the retailer’s revenue sharing rate and the “fit or not fit” probability is too high, the retailer will prefer the money back guarantee.