A returns policy does not make any difference under demand certainty. In the case of demand uncertainty, the outcomes, resulting from the two policies, are different. The returns policy not only extracts unit profit from the whole channel, but through reducing the wholesale price also extracts the unit profit of the manufacturer. We show that a full returns policy always raises but does not reduce the retailer's unit profit. If the two parties in a distribution channel are both risk-averse, the no returns policy is always better for the manufacture than the full returns policy, even if marginal cost is small.
International Journal of Management 24(2), pp.376-385