Counteracting Strategic Purchase Deferrals: The Impact of Online Retailers' Return Policy Decisions
Manufacturing & Service Operations Management 18(3) pp. 376-392, 2016, DOI: 10.1287/msom.2015.0570.
27 Pages Posted: 21 Sep 2014 Last revised: 9 Jul 2016
Date Written: January 21, 2016
We study how online retailers' return policy choices are affected by consumers' discount-seeking purchase deferrals, i.e., strategic consumer behavior. We focus mostly on the Internet retailing context, where consumers may not be able to assess the fit between their expectations and products at the time of purchase, thus making the issue of how lenient the retailer's return policy paramount. In this research, we investigate whether allowing returns may entice strategic consumers to purchase earlier at full price, as well as how lenient (measured by the magnitude of the refund) the optimal return policy should be. We argue that an effective return policy can not only induce higher full-price sales by limiting regret from an unfit purchase, but also signal a higher chance of clearance period unavailability. However, our results highlight that permitting returns when facing strategic consumers is a double-edged sword, for both a monopolist and competing retailers. We find that, only when a retailer can salvage without a heavy discount, an optimally determined (partial) refund that is less than the clearance period price can mitigate purchase deferrals. This finding contrasts earlier research on returns management for a monopolist retailer, which ignored strategic consumer behavior and found a partial refund that equals the salvage price to be always optimal. We also offer three explanations for when the common retail practice of offering a full refund sustains as an equilibrium decision for a monopolist: (i) Some products can be salvaged without a loss, (ii) a lenient return policy might stimulate additional aggregate demand, (iii) consumers' transaction cost may reduce return volumes. Our analysis of an arbitrary number of competing retailers yields a unique rational expectations equilibrium, where each retailer's equilibrium refund is non-decreasing in its unit salvage revenue, which we use to highlight that retailers whose unit salvage revenues are below a threshold should not allow returns, and for the retailers who should optimally offer a refund, a higher salvage revenue implies a higher full price, a higher stocking quantity, and thus a higher profit. Consequently, choosing a clearance sales partner who can salvage at prices higher than competing clearance mediums helps a retailer gain competitive advantage when selling to strategic consumers.
Keywords: OM-Marketing Interface, Retailing, Pricing and Revenue Management, Returns, Strategic Purchase Deferrals, Rational Expectations
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