Supply chain coordination with customer returns and refund-dependent demand

This paper examines a supply chain consisting of a single manufacturer and a single retailer, who faces with demand uncertainty. We investigate how customer returns influence the retailer's ordering decision as well as the profits of the manufacturer and the retailer. When the refund amount is exogenous, the supply chain can be coordinated by the buyback contract. We then treat the refund amount as a decision variable and show that in that case the buyback contract generally cannot coordinate the supply chain. We numerically illustrate and measure the profit loss to the supply chain due to this lack of coordination.