Decision and Coordination of an E-commerce Supply Chain Considering Returns and Network Externalities

Abstract

Considering the large number of returns in online sales and the network externalities of e-platforms, we develop a decentralized model and a centralized model to explore the impacts of returns and network externalities on e-commerce supply chain (ECSC) decisions. We show that in the decentralized model, the service level, price, market demand, and ECSC members’ profits increase with the network externality strength. However, the service level and price increase, while the market demand and ECSC members’ profits decrease with the product return rate. The centralized model is the optimal operating mode when it is properly coordinated. We design the “commission and return cost-sharing” contract to optimize ECSC, in which the proportion of the e-platform’s sharing of the return handling cost is exactly equal to the proportion of the system profit after coordination. Based on the decentralized model, we develop two extended models in which we endogenize the impacts of the service level and return rate on the network externality strength. Through comparisons between the extended and decentralized models, we show that high-quality service can improve ECSC’s profitability, while a high return rate hurts its economic performance.

Keywords

E-commerce supply chain / coordination mechanism / network externalities / return products

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