Target Marketing in a Distribution Channel: Implications for Manufacturer Returns Policy
Resource
Journal of Management 23 (5): 537-556
Journal
Journal of Management
Journal Volume
23
Journal Issue
5
Pages
537-556
Date Issued
2006
Date
2006
Author(s)
Jeng, Shih-Ping
Abstract
retail price and retailer’s returns policy, consumers decide whether and which product to buy. The results show that providing returns policy on the low-end product at the retail level can be used to screen consumers if consumers’ valuations for product quality are positively correlated with their costs of returns. The screening effect, in turn, can alleviate the retailer’s incentive problems in a distribution channel. Under some circumstances, the benefits of screening effects and less retailer’s incentive problem are so high that it is worth for the manufacturer taking returns from the retailer even the returned merchandise is worthless. When it happens, the manufacturer optimally reduces the quality for the low-end product to best take advantage of the screening function of the returns policies. The intuition behind the result is, first, by using the returns policy as a screening tool, the retailer is able to extract extra consumer surplus from the high segment. That is, the cannibalization problem of the product line is alleviated as the retailer allows returns on the low-end product. Second, if the retailer accepts returns on the low-end product, this returns policy in turn reduces the difference in willingness-to-pay between the two segments, and as a result the retailer faces two more similar consumer segments. The retailer therefore has more incentives to target different products to consumers rather than sell the high-end product to the high segment only. Thus the lack of channel coordination in targeting is mitigated.
Type
journal article