Summary: Manufacturers facing uncertain demand may induce distributors to carry ample stocks of their products by agreeing to accept returns of unsold goods for credit. We model the manufacturer's decision to accept returns, showing that this decision depends crucially on the nature of the demand uncertainty. Uncertainty over customer arrivals favors returns, while uncertainty over consumers' valuation of the manufacturer's product leads distributors to set retail prices too high (from the manufacturer's standpoint) when returns are allowed. We show that returns can be expected to raise retail prices, while maintaining or shrinking distributor margins.