Returns handling in e-commerce: How to avoid demand negativity in supply chain contracts with returns?

E-commerce constitutes a system for the online purchase and sale of services and commodities. This theoretical article investigates the manufacturer handling strategy which occurs in online shopping, in a centralized or decentralized channel under the wholesale price contract. The retailer’s optimal order quantity, price, and the manufacturer’s wholesale price are derived assuming additive uncertainty in demand. The possibility of negative demand realizations, which may occur in adverse market circumstances, is verified in the investigated models. It was proved that the imposition of the non-negativity prerequisite on demand is vital to obtain complete results. The non-negativity constraint in this study incorporates consumer’s returns handling costs which is different than the previously used constraint. As an extension of the additive case, the model with iso-elastic demand is discussed. The theoretical analysis is enriched with numerical examples.