Consumer Mending and Online Retailer Fit-Uncertainty Mitigating Strategies

Abstract

This study examines how online retailers operating in consumer markets characterized by consumer fit uncertainty such as apparel and accessories can mitigate such uncertainty through effective designs of return policies. We find that when consumers have the option to self-mend a product to assure a proper fit, an online retailer can devise its return policy to encourage or suppress consumer mending as a fit-uncertainty mitigating mechanism. First, our analysis shows that an online retailer benefits from easing the return policy and lowering the consumer return cost if the value of a good fit product is low, but benefits from tightening the return policy and maintaining a reasonable return cost for consumers if the value of a good fit product is high. Second, we find that in the parameter region where the value of a good fit product is high but not too high, a tightened return policy leads to a greater consumer surplus in addition to an increased retailer profit, suggesting a win-win situation and improved social efficiency. And even beyond this win-win region, the social welfare may still increase with tightened return policy when the gains in retailer profit or consumer surplus exceeds the loss of the other party. Finally, we show that when the value of a good fit product is sufficiently high, the capability of manipulating consumer mending as a fit-uncertainty mitigating mechanism allows a pure online retailer to earn a greater profit than a dual channel retailer that sells the product through both the online and the offline channels. Our theoretical insights provide explanations to many interesting practices in the online retailing industry.