Pricing and return policy under various supply contracts in a closed-loop supply chain

Abstract

This study investigates pricing and return policies under various supply contracts in a closed-loop supply chain in which a supplier has more bargaining power than a retailer. We develop integrated supply contract models based on the principal-agent paradigm. Specifically, the supplier with more bargaining power devises a supply contract, acting as a Stackelberg leader. Then, given the contract offer, the retailer decides on pricing and return policies which affect consumers' demand and return behaviours. We look into three commonly used supply contracts, i.e. wholesale price, buy-back and quantity discount contracts. The main purpose of this study is to explore how each supply contract affects the retailer's decision on pricing and return policies, which in turn influence the profits of the entire supply chain and of its members. In doing so, we focus on investigating which contract coordinates the supply chain involving the retailer's moral hazard. Through analytic comparison of contracts and extensive numerical analyses, we present numerous propositions to enrich the body of knowledge in the closed-loop supply chain and to provide meaningful decision guidelines to the practice.