Coordination of a two level supply chain with two substitutable items

This study deals with a single period newsboy type inventory problem with two products which can be substituted if one of them is out of stock in a two level supply chain. It is allowed to return some or all of the unsold products to the manufacturer with some credit. The expected chain profit, the expected retailer and the manufacturer profit expressions are derived under general conditions. Special cases are inspected to investigate the conditions under which channel coordination is achieved. It is demonstrated that channel coordination can not be achieved if full credit and full returns are allowed.