Returns management in a supply chain considering freight insurance and consumer disappointment aversion

Abstract

Returns tend to cut profit and leave consumers unhappy, making returns management a critical issue in supply chain operations. This paper investigates the role of consumer disappointment aversion, stemming from product value uncertainty, in shaping critical operational decisions in a return-focused supply chain, including the pricing policy, the manufacturer’s returns collection strategy (direct returns from consumers or indirect buybacks from the e-tailer), and the e-tailer’s return freight insurance strategy (e-tailer-return freight insurance or consumer-return freight insurance). Through a game-theoretical approach, we reveal several compelling insights. First, as consumer disappointment aversion rises, both the manufacturer and the e-tailer are compelled to lower prices to maintain demand, despite an overall decline in profitability. Second, regarding the impacts of consumer disappointment aversion on the supply chain equilibrium, two pivotal findings are uncovered. For the e-tailer, high consumer disappointment aversion motivates the e-tailer-return freight insurance strategy. Furthermore, how consumer disappointment aversion shapes the manufacturer’s returns collection strategy is strongly linked to the e-tailer’s choice of return freight insurance strategy. Specifically, in certain cases, in anticipation of the e-tailer’s adoption of e-tailer-return freight insurance strategy, the manufacturer is incentivized to prefer direct returns when consumer disappointment aversion is relatively low. However, the manufacturer is incentivized to select direct returns when facing a relatively high consumer disappointment aversion, anticipating the e-tailer’s adoption of consumer-return freight insurance strategy. Moreover, our analysis indicates that each equilibrium has the potential to achieve Pareto efficiency and even a win–win–win outcome that benefits all parties including consumers.