Integrated inventory model of returns-quantity discounts contract

In the traditional inventory problem, to secure demand risk a retailer often requests the right to return unsold goods, although this is associated with higher wholesale prices. Various studies have attempted to illustrate the returns scenario. However, these studies have focused on optimization from the retailer's perspective only, and have thus ignored the fact that the manufacturer might have no incentive to accept returns. This study takes account of the self-interest of both the retailer and the manufacturer, and demonstrates that a quantity discount scheme should provide the manufacturer with incentive to accept returns. A three-stage theoretical model is developed and presented to illustrate the returns-quantity discounts contract, and demonstrates that the contract is self-enforcing. Furthermore, it is demonstrated that Pareto efficiency can be attained in the model. The scenarios are illustrated through a numerical example.