The Option Value of Returns: Theory and Empirical Evidence

Eric T. Anderson (), Karsten Hansen () and Duncan Simester ()
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Eric T. Anderson: Marketing Department, Kellogg School of Management, Northwestern University, Evanston, Illinois 60208
Karsten Hansen: Marketing Department, Kellogg School of Management, Northwestern University, Evanston, Illinois 60208
Duncan Simester: MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142

Marketing Science, 2009, vol. 28, issue 3, 405-423

Abstract: When a firm allows the return of previously purchased merchandise, it provides customers with an option that has measurable value. Whereas the option to return merchandise leads to an increase in gross revenue, it also creates additional costs. Selecting an optimal return policy requires balancing both demand and cost implications. In this paper, we develop a structural model of a consumer's decision to purchase and return an item that nests extant choice models as a special case. The model enables a firm to both measure the value to consumers of the return option and balance the costs and benefits of different return policies. We apply the model to a sample of data provided by a mail-order catalog company. We find considerable variation in the value of returns across customers and categories. When the option value is large, there are large increases in demand. For example, the option to return women's footwear is worth an average of more than $15 per purchase to customers and increases average purchase rates by more than 50%. We illustrate how the model can be used by a retailer to optimize his return policies across categories and customers.

Keywords: choice models; consumer behavior; decisions under uncertainty; direct marketing; e-commerce; econometric models; hierarchical Bayes analysis; latent variable models; marketing operations interface; service quality; targeting; returns (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (90)

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