Consumer Behavior and Product Return Policies

Abstract

This paper examines the relationship between consumer behavior and firm policies regarding product returns. To characterize possible types of consumers with regard to their tendencies to return a firm's product, we construct a model with three essential factors related to product returns: hassle costs experienced by consumers from returning the product, the extent to which a consumer can use the product before returning it, and the firm’s value of salvaging a  returned product. Consumer types fall into three categories: consumers who always return the product and fully use it before doing so, consumers who never return the product, and consumers whose return decisions are sensitive to the firm’s return policy and might partially use the product before returning it. In characterizing the firm's optimal price and return payment, we derive the following results for the types of consumers we analyze. Of the three consumer types, the firm can feasibly not sell to the never-return type consumers and has a profit motive in some scenarios not to do so. Additionally, because a firm’s optimal profit is strictly decreasing in the hassle cost of the return-policy-sensitive consumer type and strictly increasing in the extent to which this consumer type uses a product before returning it, the firm has an incentive to make product returns easier for these consumers and extend warranty periods. This hassle cost result extends to multiple types of return-policy-sensitive consumers, whereas the product use result extends under a limiting condition.

Keywords: Product Return Policies, Pricing