Scenario C: Buy$-$back Contracts

Buy$-$back contracts: in this contract, the seller agrees to buy back unsold goods from the buyer for some agreed$-$upon price higher than the salvage value.

Buyer's risk is decreased and thus he is willing to order more $($buyer makes ordering decision$).$

Supplier's risk is increased.

The contract must be designed such that all parties benefit.

Sunglass example

The supplier Zamatia agrees to buy back any leftover inventory at the price of $$40$ per unit, which is higher than the salvage value of $$25.$

In this case, the retailer UV earns $115-75=$$$40$ for each unit sold, and loses $75-40=$$$35$ for each unit of unsold. This is the information you need to apply newsvendor model.

Zamatia earns $75-35=$$$40$ for each unit sold and earns $75-35-40+25$

$=$$$25$ for each unit unsold.