Optimal Pricing and Return Policies for Perishable Commodities

TLDR

The study examines pricing decisions for producers of perishable commodities with short shelf lives. The authors develop a hierarchical model building on single‑period inventory results to analyze pricing and return policies. The analysis finds that current pricing and return policies are suboptimal; while partial‑credit returns can coordinate the channel, their optimal level depends on retailer demand and is not optimal in a multi‑retailer environment, whereas offering partial credit for all unsold goods achieves coordination.

Abstract

This paper considers the pricing decision faced by a producer of a commodity with a short shelf or demand life. A hierarchical model is developed, and the results of the single period inventory model are used to examine possible pricing and return policies. The paper shows that several such policies currently in effect are suboptimal. These include those where the manufacturer offers retailers full credit for all unsold goods or where no returns of unsold goods are permitted. The paper also demonstrates that a policy whereby a manufacturer offers retailers full credit for a partial return of goods may achieve channel coordination, but that the optimal return allowance will be a function of retailer demand. Therefore, such a policy cannot be optimal in a multi-retailer environment. It is proven, however, that a pricing and return policy in which a manufacturer offers retailers a partial credit for all unsold goods can achieve channel coordination in a multi-retailer environment.