Customization and Returns

forthcoming at Management Science

42 Pages Posted: 5 Sep 2019 Last revised: 20 Dec 2021

See all articles by Gokce Esenduran

Gokce Esenduran

Purdue University - Department of Management

Paolo Letizia

University of Tennessee

Anton Ovchinnikov

Smith School of Business - Queen's University; INSEAD - Decision Sciences

Date Written: May 8, 2020

Abstract

Recent advances in information technology, advanced manufacturing (robotics, 3D printing, etc.), and logistics have allowed firms to customize their products to the specifications of individual consumers, who, in turn, prefer these products to standard ones. In the unlikely event that customized products do not match expectations, however, consumers often feel entitled to a return. Should firms offer returns on customized products?

We examine this question via a Stackelberg game model in which the firm (leader) decides the prices and returns policies for its customized and standard products; consumers (followers) decide which product to buy given the initial noisy valuations and, upon experiencing the product, whether to return it. Both parties act strategically: Forward-looking consumers incorporate the real option value of possible returns into their initial purchasing decisions, and the firm incorporates consumers' best purchase and return response into its pricing and returns policy decisions.

Our model produces three key insights. First, firms can use customized products to induce some consumers who otherwise would buy and return a standard product to switch to lower-return-rate customized products. Second, it may be optimal to offer returns on customized products, despite their lower salvage value. Third, firms can increase profits and reduce (total) returns by offering returnable customized products.

Keywords: customized products, consumer returns, Stackelberg game, IKEA effect, real option, strategic, forward-looking consumers

Suggested Citation

Esenduran, Gokce and Letizia, Paolo and Ovchinnikov, Anton, Customization and Returns (May 8, 2020). forthcoming at Management Science, Available at SSRN: https://ssrn.com/abstract=3444244 or http://dx.doi.org/10.2139/ssrn.3444244

Gokce Esenduran (Contact Author)

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States

Paolo Letizia

University of Tennessee ( email )

223 Stokely Management Center, Volunteer Blvd.
Knoxville, TN KNOX 37996
United States

Anton Ovchinnikov

Smith School of Business - Queen's University ( email )

143 Union Str. West
Kingston, ON K7L3N6
Canada

INSEAD - Decision Sciences ( email )

United States

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