This Article Full Text (PDF) e-companion References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Google Scholar Articles by Taylor, T. A. Articles by Xiao, W.

Incentives for Retailer Forecasting: Rebates vs. Returns

Haas School of Business, University of California, Berkeley, Berkeley, California 94720
Stern School of Business, New York University, New York, New York 10012
taylor{at}haas.berkeley.edu
wxiao{at}stern.nyu.edu

This paper studies a manufacturer that sells to a newsvendor retailer who can improve the quality of her demand information by exerting costly forecasting effort. In such a setting, contracts play two roles: providing incentives to influence the retailer's forecasting decision and eliciting information obtained by forecasting to inform production decisions. We focus on two forms of contracts that are widely used in such settings and are mirror images of one another: a rebates contract, which compensates the retailer for the units she sells to end consumers, and a returns contract, which compensates the retailer for the units that are unsold. We characterize the optimal rebates contracts and returns contracts. Under rebates, the retailer, manufacturer, and total system may benefit from the retailer having inferior forecasting technology; this never occurs under returns. Although one might conjecture that returns would be inferior because its provision of "insurance" would discourage the retailer from forecasting, we show that returns are superior.

Key Words: forecasting; supply chain contracting; rebates; returns; endogenous adverse selection
History: Received: October 12, 2006; accepted: March 22, 2009.