Customization and Returns

Gökçe Esenduran (), Paolo Letizia () and Anton Ovchinnikov ()
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Gökçe Esenduran: Krannert School of Management, Purdue University, West Lafayette, Indiana 47907
Paolo Letizia: Stokely Management Center, University of Tennessee, Knoxville, Tennessee 37996
Anton Ovchinnikov: Smith School of Business, Queen’s University, Kingston, Ontario K7L 3N6, Canada; INSEAD, Fontainebleau 77300, France

Management Science, 2022, vol. 68, issue 6, 4517-4526

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; IKEA effect; real option; strategic consumers (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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