Buyback contracts counter double marginalization by lowering the cost of overstocking for the retailer.

Question

Quizplus · Accepted Answer

Buyback contracts allow the retailer to return unsold goods to the supplier at a predetermined price, reducing the risk of overstocking and ultimately lowering the cost for the retailer. This helps to counteract the problem of double marginalization, where both the retailer and supplier add a markup, leading to a higher final price for the consumer. By reducing the retailer's cost, buyback contracts allow for more competitive pricing and lower prices for the consumer.

Buyback Contracts Counter Double Marginalization by Lowering the Cost of Overstocking