Coordinating a three level supply chain with flexible return policies

This paper studies the coordination issue of a three level supply chain selling short life cycle products in a single period model. The manufacturer first negotiates the trade contract with the retailer, then with the supplier. We construct the so-called flexible return policy by setting the rules of pricing while postponing the determination of the final contract prices. With return policies between each pair of adjacent firms, unsold products or used modules dissembled from the unsold products are returned level by level from the retailer to the upstream firms and each firm shares in the loss due to the overstock. We show that the three level supply chain can be fully coordinated with appropriate contracts and the total profit of the channel can be allocated with any specified ratios among the firms.