Return and refund policy for product and core service bundling in the dual‐channel supply chain

• Author: Yang Yu,Jiafu Tang,Chun Kit Kwong,Zichen Zhang,Xinggang Luo
• Date: 01 January 2019
• Published date: 01 January 2019
• DOI: http://doi.org/10.1111/itor.12385

Intl. Trans. in Op. Res. 26 (2019) 223–247

DOI: 10.1111/itor.12385

INTERNATIONAL

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IN OPERATIONAL

RESEARCH

Return and refund policy for product and core service bundling

in the dual-channel supply chain

Zichen Zhanga,b, Xinggang Luoa, c, Chun Kit Kwongb, Jiafu Tangaand Yang Yua

aDepartment of Systems Engineering, College of Information Science and Engineering, NortheasternUniversity, Shenyang,

Liaoning, P.R. China

bDepartment of Industrial and Systems Engineering, The Hong Kong PolytechnicUniversity, Hung Hom, Kowloon,

Hong Kong, P.R. China

cManagement School, Hangzhou Dianzi University, Hangzhou, Zhejiang, P.R. China

E-mail: zczhang2013@hotmail.com [Zhang]; xgluo@mail.neu.edu.cn [Luo]; c.k.kwong@polyu.edu.hk [Kwong];

jftang@mail.neu.edu.cn [Tang]; yuyang@ise.neu.edu.cn [Yu]

Received 8 April 2016; received in revised form 12 November 2016; accepted 22 November2016

Abstract

Recently, manufacturers have increasingly begun to sell products bundled with core services. However, cus-

tomers are inconvenienced by individually returning the product or refunding the service after they have

purchased a bundle. This paper presents a return and refund policy under two-stage demand uncertainty

(uncertainty at time 0 and inherent uncertainty), for products bundled with core services in the dual-channel

supply chain. Consumers can use the direct channel to return the default product–service bundle. In contrast,

consumers in the retail channel can unsubscribe from the retailer’s diverse core service by first receiving an

unused service refund; the retailer then returns the product to the manufacturer. We use an approximate

algorithm to solve for the optimal productquantity in the retail channel, demonstrating that the proportional

marginal profit has a greater positive influence on the retailer’s profit, and especially for the demand with a

higher mean and lower variance.

Keywords:bundling; return; uncertainty

1. Introduction

Bundling is a common marketing strategy among today’s market competition. Regarding the sales

pattern aspect, product bundling can be classified into pure bundling and mixed bundling. Re-

cently,the range of bundling has not solely been limited to product bundling, and products bundled

with various services, such as core services, have become gradually prevalent (Guiltinan, 1987).

A core service is a type of “compulsory” service for consumers, and without this, a product’s

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2017 International Federation ofOperational Research Societies

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224 Z. Zhang et al. / Intl. Trans. in Op. Res. 26 (2019) 223–247

value may decrease sharply and deter consumers from its use, as with base after-sales services

(Kurata and Nam, 2010, 2013). The core service in product and service bundling primarily ex-

ists in other fields, including shipping services in online shopping platforms (Li and Dinlersoz,

2012), television programs in cable television companies (Ferrer et al., 2010), and telephone calling

services in the telecommunications industry (Yang and Ng, 2010). The core service is always bun-

dled with the product for sale; otherwise, the consumer can use neither the product nor the core

service.

Product and core service bundling is more attractive to consumers because of the bundling

discount. However, returning the product or unsubscribing from the core service individually from

the product and core service bundling presents an inconvenience for both sellers and consumers.

For example, most local radio and television network companies in China typically provide or

“rent” cable boxes freely to consumers, and consumers must only pay for the subscribed cable

television programs bundled with the cable box. However, if consumers unsubscribe from the

television programs before the expiration date, they must simultaneously return the cable box, and

are charged some depreciation fees. Verizon Wireless in the United States provides equipment (e.g.,

video media servers or digital adapters) for consumers who subscribe to Fios Internet service.

When consumers unsubscribe from the service, they must return the equipment within 30 days.

Another common example involves the B2C website, as sellers in the online shopping platform

often bundle paid shipping services with the product to attract more consumers. Further, China’s

most well-known online shipping platform, taobao.com,1followsaprovisionfor“returnswithno

reason within seven days.” Once the consumer wishes to return the product forpersonal reasons, he

must pay the paid shipping service costs, and then he receives a product refund. This phenomenon

is also ubiquitous for “E-tailers” who have both online shops and brick-and-mortar stores, such as

Suning.com in China. Consumers in the United States can buy an iPhone 6 Plus from the Apple

Store using a default shipping service, or buy from Amazon.com with price-differentiated shipping

services. Whenconsumers return the product for personal reasons, they also paythe shipping service

fees, deducted fromtheir refund. The return and refund policy for product and core service bundling,

unlike product return policies in previous literature, primarily focuses on consumers returning the

entire product and core service bundle, rather than only returning the product or unsubscribing

from the core service. This is because only retaining a core service or product is either useless for

the consumer, or impractical for the seller.

We assume that one manufacturer in the dual-channel supply chain can provide the products

bundled with the default core service in a direct channel (e.g., the franchise store’s authorized after-

sales service), or the individual products for a retailer in the retail channel. The retailer can then

provide more diverse core services (e.g., some less expensive after-sales services from third-party

stores) to attract consumers in the retail channel after purchasing individual products from the

manufacturer. Based on the dual-channel supply chain’s return and refund policy, consumers who

buy products bundled with a default core service can directly return the bundle to the manufacturer

in the direct channel. Alternatively, consumers in the retail channel must first unsubscribe from the

retailer’s diverse core service in the retail channel, and the retailer can then return the product to

the manufacturer. Our framework can be illustrated by the schematic shown in Fig. 1.

1Source: http://service.taobao.com/support/seller/knowledge-5701303.htm?spm=a215a.7392575.1998073017.19.Ml9

BfE&_pvf=sellerSearch.

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2017 The Authors.

International Transactionsin Operational Research C

2017 International Federation ofOperational Research Societies