Reply: Do Returns Policies Intensify Retail Competition

Returns policies are common in many sectors of retail distribution. The authors initially (1997) showed that with demand uncertainty, a returns policy could improve manufacturer profitability under certain conditions. Wang (forthcoming) showed that returns policies do not change manufacturer profitability when demand is certain and retailing is competitive. They show that returns policies do increase manufacturer profitability by attenuating retailer price competition when demand is low, and intensifying competition when demand is high. Importantly, this effect holds only in the presence of demand uncertainty. Further, the conditions under which a returns policy raises the manufacturer's profit are weaker when retailing is a duopoly than when retailing is a monopoly. This suggests that returns policies serve both to manage competition and mitigate demand uncertainty.