Date of Award


Degree Type


Degree Name

Master of Philosophy (MPHIL)


Computing and Decision Sciences

First Advisor

Prof. LENG Mingming


This paper considers a two-echelon supply chain involving a manufacturer and a retailer who make their pricing, quality, and restocking fee decisions under the word-of-mouth (WOM) effect. To investigate the decision-making problem for the sales and product returns, we construct a leader-follower game model in which the manufacturer first determines his quality effort and the wholesale price and the retailer then decides on her retail price and the restocking fee. Our results show that the wholesale and retail prices under no WOM effect are smaller than those when the WOM effect exists; and, as the WOM has a higher impact on consumer purchases, the retailer should increase her retail price, and the manufacturer should also spend more quality control effort and raise his wholesale price. In addition, when the WOM effect exists, both the restocking fee and the retail price are decreasing in the mismatch probability. It is interesting to learn that a positive WOM may not help achieve more total sales and realized sales than a negative WOM, and the realized sales under the full refund policy may be lower than those under a partial refund policy. We also find that the manufacturer and the retailer may not benefit under the WOM effect, which mainly depends on how consumers are sensitive to the restocking fee and the WOM. The retailer can benefit from the full refund policy when the mismatch chance is not high, whereas the manufacturer can always benefit from the full refund policy.

Recommended Citation

Hui, S. Y. (2017). Managing sales and product returns under the word-of-mouth effect: Pricing, quality, and restocking fee decisions (Master's thesis, Lingnan University, Hong Kong). Retrieved from