Optimizing price, order quantity, and return policy in the presence of consumer opportunistic behavior for online retailers

Moutaz Khouja and Ramzi Hammami

European Journal of Operational Research, 2023, vol. 309, issue 2, 683-703

Abstract: Product return rates are much higher for online retailers than brick-and-mortar retailers. In this paper, we develop a model for optimizing the retailer’s price, quantity, and terms of the product return policy in the presence of consumer opportunistic behavior (wardrobing). We consider a seasonal product and formulate and solve a newsvendor (e-tailer) model where an in-season price markdown may be used before any remaining inventory is salvaged at the end of the season. We compare a return policy in which refunds for returned products are in cash to one where refunds are in store credit or gift cards (SC/GC). Products sold at the clearance (salvage) price cannot be returned or exchanged. We find that with both cash and SC/GC refunds, consumer product match uncertainty, measured by the probability of the product matching consumers’ expectations, benefits consumers who keep the product more than consumers who return it. Moreover, under realistic conditions, using SC/GC refund increases the profits of the e-tailer and benefits consumers who keep the product by lowering the price. We also find that even when consumers redeem all SC/GC, using SC/GC refunds can still be beneficial to the retailer because SC/GC refunds deter proportionally more wardrobers from buying than consumers from buying. As a result, costly returns are reduced and the e-tailer benefits.

Keywords: Pricing; Return policy; Wardrobing; Store credit and gift card refund (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221723000693
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:309:y:2023:i:2:p:683-703

DOI: 10.1016/j.ejor.2023.01.035

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().