The Impact of Product Returns and Retailer's Service Investment on Manufacturer's Channel Strategies*

Abstract

We study the distribution channel decision of a manufacturer who considers whether to add an online channel (direct channel) to its brick‐and‐mortar retailer (indirect channel). The retailer faces the opportunity to invest in store assistance to help consumers choose products and thus reduce product returns. Special attention is given to the impact of product returns and retailer's store assistance investment on manufacturer's dual channel decision. We examine conditions under which the manufacturer uses dual channels and how various relevant factors affect its channel decision under two settings, depending on whether the retailer has its own online store or not. When the retailer does not have its online store, we find that (i) the addition of the direct channel raises the wholesale price; (ii) the direct channel addition hurts the retailer if the nonreplacement rate is low; (iii) the manufacturer has a lower incentive to add the direct channel when the retailer's service cost is lower or its returns reduction rate from service investment is higher; and (iv) the manufacturer should treat its own returns handling cost as a key factor in its channel structure decision. In addition, when the retailer operates an online store, we find that the manufacturer may have an incentive to add a direct channel such that both firms own direct channels.

Consumer Inter‐Product Showrooming and Information Service Provision in an Omni‐Channel Supply Chain

“…Third, our study mainly addresses the issue of information service provision that resolves consumer valuation uncertainty and reduces fit-related returns. Ofek et al (2011) and Xia, Xiao, and Zhang (2017) pointed out that the probability of mismatch and returns can be reduced by providing information service in physical stores. Besides, the growth of online selling highlights the value of information service in the online channel.…”

“…Ofek et al. () and Xia, Xiao, and Zhang () pointed out that the probability of mismatch and returns can be reduced by providing information service in physical stores. Besides, the growth of online selling highlights the value of information service in the online channel.…”

Competition Policy and Antitrust Law: Implications of Developments in Supply Chain Management

“…Managerial Perspectives.-In the wake of developments in cross-channel shopping and multi-channel distribution systems, two different perspectives have emerged to guide distribution strategy. The first is that multiple channels of distribution are harmful to performance given they can lead to free riding (Sandrine, 2013), cross-channel cannibalization (Pu, Gong & Han, 2017), and negative spillover effects across channels (Bernstein et al, 2009;Cao, Zhang & Chen, 2008;Dan, Xu & Liu, 2012;Van Birgelen, De Jong & De Ruyter, 2006;Xia, Xiao & Zhang, 2017;Xing & Liu, 2012). These impacts reflect different forms of channel conflict that can adversely affect performance (Coughlan et al, 2001;Geyskens, Gielens & Dekimpe, 2002;Pu et al, 2017).…”

Searching for the right operations strategy to manage the repair process across the reverse supply chain

“…Therefore, relevant contributions uncovered the impact of these returns (online returns) on the retailer's profitability, whereas others have focused on the investment of the company in managing returns. Indeed, Hjort and Lantz (2016) determined that a free returns policy brings short-term benefits for the retailer, such as an increase in sales, but it may negatively affect the profitability, due to the higher costs to manage returns; Xia and Zhang (2017) developed a model to determine whether a manufacturer is incentivised to invest in the service management in order to reduce the chance of product returns.…”