Returns policy, new model introduction, and consumer welfare

Returns policy, new model introduction, and consumer welfare

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Article ID: iaor20101847
Volume: 124
Issue: 2
Start Page Number: 299
End Page Number: 309
Publication Date: Apr 2010
Journal: International Journal of Production Economics
Authors:
Keywords: consumer behaviour
Abstract:

This paper investigates how economic outcomes differ for new model introduction between two extreme contracts: outright sales contract and returns policy contract with full credit. Under the outright sales contract, we show that the retailer's incentive to introduce a new model can lead to a reduction of consumer welfare when the retailer is moderately risk averse. The primary conclusion from this study is that the returns policy contract resolves this conflict between firms and consumers, and that the supply chain introduces the new model only when consumer surplus from the new model is higher than that from the old model.

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