When to Carry Eccentric Products? Optimal Retail Assortment under Consumer Returns

33 Pages Posted: 17 Apr 2011 Last revised: 21 Dec 2014

See all articles by Aydin Alptekinoglu

Aydin Alptekinoglu

Smeal College of Business, Pennsylvania State University

Alex Grasas

Universitaria EADA - EADA Business School

Date Written: November 10, 2012

Abstract

To understand whether retailers should consider consumer returns when merchandising, we study how the optimal assortment of a price-taking retailer is influenced by its return policy. The retailer selects its assortment from an exogenous set of horizontally differentiated products. Consumers make purchase and keep/return decisions in nested multinomial logit fashion. Our main finding is that the optimal assortment has a counterintuitive structure for relatively strict return policies: It is optimal to offer a mix of the most popular and most eccentric products when the refund amount is sufficiently low, which is a form of risk sharing between the retailer and consumers. In contrast, if the refund is sufficiently high, or when returns are disallowed, optimal assortment is composed of only the most popular products (a common finding in the literature). We provide preliminary empirical evidence for one of the key drivers of our results: more eccentric products have higher probability of return – conditional on purchase.

Keywords: assortment planning, product variety management, product returns, nested logit

Suggested Citation

Alptekinoglu, Aydin and Grasas, Alex, When to Carry Eccentric Products? Optimal Retail Assortment under Consumer Returns (November 10, 2012). Available at SSRN: https://ssrn.com/abstract=1809198 or http://dx.doi.org/10.2139/ssrn.1809198

Aydin Alptekinoglu (Contact Author)

Smeal College of Business, Pennsylvania State University ( email )

University Park, PA 16802
United States

Alex Grasas

Universitaria EADA - EADA Business School ( email )

CIF ESG08902645
C/ Aragó 204
Barcelona, CP 08011
Spain

HOME PAGE: http://www.alexgrasas.cat

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