Pareto Improving Supply Chain Coordination Under a Money-Back Guarantee Service Program

Money‐back guarantee (MBG) is a well‐known service offered by many retailers. Under the MBG policy, a purchased item by a consumer can be returned for a full refund. In this paper, we explore a supply chain (SC) system comprising of one retailer, which offers the money‐back guarantee policy and faces a stochastic demand. With a given supply contract offered by the supplier, the retailer makes decisions on the order quantity and the market coverage of the money‐back guarantee service. With reference to real‐world practices, we examine three models, namely, (1) the traditional wholesale pricing model without the buyback contract, (2) the model with a buyback contract (between the supplier and the retailer) for unsold items, and (3) a dual‐buyback (DB) contract model for both unsold and consumer returned items. We find that using the buyback contract alone for unsold items cannot achieve Pareto improving supply chain coordination, whereas the DB contract can. Numerical findings also indicate that the DB contract can lead to an expansion of the money‐back guarantee service program to cover more customers. This paper’s findings support the implementation of the DB contract, which is commonly seen in the industry, for efficient supply chain management in the presence of the money‐back guarantee service program.