Counteracting Strategic Purchase Deferrals: The Impact of Online Retailers’ Return Policy Decisions

Abstract

Online shoppers value lenient return policies as they are unable to assess whether products match their expectations. We study how consumers’ discount-seeking purchase deferrals affect online retailers’ return policy choices. Lenient returns may induce higher full-price sales by limiting consumer regret, while signaling clearance unavailability risk. Contrasting earlier research that concluded a monopolist must set the refund at the clearance price when strategic consumers were overlooked, we find that an optimal refund bounded by the clearance price can mitigate purchase deferrals only when a monopolist salvages at mild discounts. To explore conditions under which a monopolist permits “full-refund returns,” we consider three scenarios: we permit clearing inventory without a loss; we assume lenient returns stimulate aggregate demand; we consider consumers’ transaction costs. We also derive a unique rational expectations equilibrium for competing retailers, wherein each retailer’s equilibrium refund is nondecreasing in its clearance price. Furthermore, retailers with clearance prices below a threshold should not allow returns, and those who do, higher clearance revenues imply higher full prices, higher quantities, and higher profits. We conclude that a credible clearance partner salvaging at higher prices than those at competing clearance mediums helps retailers gain competitive advantage when selling to strategic consumers.

Whether a retailer should enter an e‐commerce platform taking into account consumer returns

“…In this subsection, the retailer offers offline return service and chooses not to enter the platform. As we all know, returned products have less value than new products, that is, the salvage value of returned product v is less than the product production cost c ; a similar assumption can be found in Altug and Aydinliyim (). Considering return loss, the retailer's profit function can be presented as follows: …”

“…Then Mukhopadhyay and Setaputra () further investigated optimal return strategies of online retailers. Moreover, some scholars studied online return strategies under different scenarios, such as the impact of consumer action of waiting for product discounts on optimal return strategies (Altug and Aydinliyim, ), firms’ optimal shipping cost and return service fee in the context of no‐reason return policy (Hua et al., ), the impact of consumer returns of optimal channel choice of manufacturers (Letizia et al. ), and optimal offline showroom strategy while considering consumer returns (Li, ).…”

The Optimal Carbon Reduction and Return Strategies under Carbon Tax Policy

“…Bower and Maxham [25] used two surveys and actual customer spending dates to indicate normative assumptions and the long-term consequences of fee and free returns and presented the idea that online retailers should offer either a free online return policy or a minimum fee return policy if they can determine consumers' reactions to fee returns. Altug and Aydinliyim [26] studied how consumers' discount-seeking purchase deferrals affect the return policy of online retailers and found that retailers in some conditions can gain a competitive advantage when selling to strategic consumers. Sahoo et al [27] explored the impact of online product reviews on the optimal online return strategy and showed that unbiased online reviews benefit consumers and that biasing reviews upwards results in more returns.…”

Taking stock of consumer returns: A review and classification of the literature

“…Numerous studies show that a product's salvage value is a critical determinant of a retailer's optimal return policy choices. In particular, these studies find that retailers with more efficient salvaging options can offer more lenient policies (Altug & Aydinliyim, 2016;Davis et al, 1995;Su, 2009). Shulman et al (2010) focus on reverse channel design for salvaging.…”