Regulating Product Return Policies: The Trade-off between Efficiency and Distribution

49 Pages Posted: 19 Dec 2018 Last revised: 18 May 2020

See all articles by Shmuel I. Becher

Shmuel I. Becher

Victoria University of Wellington

Eberhard Feess

Frankfurt School of Finance & Management gemeinn├╝tzige GmbH

Roee Sarel

Institute of Law and Economics, University of Hamburg

Date Written: May 16, 2020

Abstract

The proliferation of product returns entails substantial financial and environmental costs. Nonetheless, regulators typically restrict firms from charging high fees from consumers who return products, thereby facilitating product returns. To analyze the consequences of such interventions, we consider a market in which consumers have private information on their expected consumption utility. We show that monopolistic sellers have an incentive to trigger inefficiently many returns even without regulation, as low return fees enable them to screen consumers and reap their surplus.
Regulators then face a trade-off: upper bounds on return fees exacerbate the inefficiency by causing the seller to trigger even more returns, but also lead to a redistribution of wealth from monopolistic sellers to consumers. This trade-off also arises when consumers have an endowment effect. However, if sellers can induce overoptimistic beliefs about the utility from consumption (e.g. through advertisements), then upper bounds on return fees may also lead to higher social welfare.

Keywords: product returns, return policy, consumer protection, consumer uncertainty, cancellations, withdrawals

JEL Classification: D11, D18, D9, K20

Suggested Citation

Becher, Shmuel I. and Feess, Eberhard and Sarel, Roee, Regulating Product Return Policies: The Trade-off between Efficiency and Distribution (May 16, 2020). Available at SSRN: https://ssrn.com/abstract=3297464 or http://dx.doi.org/10.2139/ssrn.3297464

Shmuel I. Becher

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

HOME PAGE: http://www.victoria.ac.nz/sacl/about/staff/samuel-becher

Eberhard Feess

Frankfurt School of Finance & Management gemeinn├╝tzige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Roee Sarel (Contact Author)

Institute of Law and Economics, University of Hamburg ( email )

Johnsallee 35
Hamburg, 20148
Germany

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