Managing Service-Level Returns in E-Commerce: Joint Pricing, Delivery Time, and Handling Strategy Decisions

Abstract

This research investigates the strategic interplay between pricing, delivery promises, and handling strategies for service-level returns—products returned by consumers due to operational issues like late delivery rather than product defects. In a vertical decentralized supply chain with a manufacturer and an e-tailer, a shorter promised delivery lead time (PDL) attracts more customers but also increases the risk of late delivery, making products more return-prone. Modeling the return rate as an endogenous variable dependent on the e-tailer’s PDL decision, we develop a Manufacturer-Stackelberg (MS) game-theoretic model to examine whether service-level returns should be handled by the manufacturer (Buy-Back strategy) or the e-tailer (No-Returns strategy). The results suggest that the optimal handling strategy depends on the e-tailer’s reselling ratio—a measure of its efficiency in extracting value from returns. A win-win situation is achieved when the reselling ratio is smaller than a threshold, as the manufacturer’s decision to buy back these returns also benefits the e-tailer. Surprisingly, when the manufacturer leaves the e-tailer to handle FFRs, a higher reselling ratio is not necessarily profitable for the e-tailer. Extending the analysis to a retailer-Stackelberg (RS) scenario reveals that the supply chain’s power structure is a fundamental determinant of the optimal returns handling strategy, shifting the equilibrium from a counterintuitive, power-distorted outcome in a MS system to an intuitive, profit-driven one in a RS system.