When to carry eccentric products? Optimal retail assortment under consumer returns
Aydm Alptekinoglu and
Alex Grasas León
Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
Abstract:
To understand whether retailers should consider consumer returns when merchandising, we study how the optimal assortment of a price-taking retailer is influenced by its return policy. The retailer selects its assortment from an exogenous set of horizontally differentiated products. Consumers make purchase and keep/return decisions in nested multinomial logit fashion. Our main finding is that the optimal assortment has a counterintuitive structure for relatively strict return policies: It is optimal to offer a mix of the most popular and most eccentric products when the refund amount is sufficiently low, which can be viewed as a form of risk sharing between the retailer and consumers. In contrast, if the refund is sufficiently high, or when returns are disallowed, optimal assortment is composed of only the most popular products (a common finding in the literature). We provide preliminary empirical evidence for one of the key drivers of our results: more eccentric products have higher probability of return – conditional on purchase. In light of our analytical findings and managerial insights, we conclude that retailers should take their return policies into account when merchandising.
Keywords: assortment planning; product variety management; product returns; nested logit (search for similar items in EconPapers)
JEL-codes: L81 M11 M31 (search for similar items in EconPapers)
Date: 2011-04, Revised 2012-11
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1272
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