The retail-market demand for a newsboy-type product is uncertain. The product's manufacturer sets: (i) a wholsale price ‘w/unit’ for selling the product to the retailer, and (ii) the refund amount ‘r/unit’ (if any) for unsold units returned by the retailer. Given w and r, the retailer determines: (i) the quantity Q that he orders from the manufacturer, and (ii) the retailer price ‘p/unit’ at which he sells to the consumers. Keeping in mind the retailer's freedom to set Q and p in the retailer's own interest, the manufacturer needs to determine how to set w and r that are optimal for the manufacturer. For this market structure, this paper studies how the level of retail-market demand uncertainty will affect the decisions (w,r,Q,p), the expected manufacturer's profit and the expected retailer's profit. Many of the effects turn out to be counter-intuitive with interesting explanations.
