A risk‐free perishable item returns policy

A returns policy, which specifies a schedule of rebates from manufacturer to retailer for product left over at the end of the selling season, encourages larger order quantities and can increase manufacturer profit. One downside from a manufacturer's perspective is the possibility of very low profit due to high rebate expense when demand is lower than expected. We take the viewpoint of a manufacturer selling a short life‐cycle product to a single risk‐neutral retailer and describe returns policies that, when compared to no returns, satisfy two conditions: (1) the retailer's expected profit is increased and (2) the manufacturer's profit is at least as large as when no returns are allowed. We call such a returns policy risk‐free.