Managing Returns Policies with Consumer Resale

Abstract

We consider a retailer selling products to consumers with uncertain valuations under a return policy. After purchases, consumers who find the products undesirable can either return them to the retailer, or resell them on their own. Both the retailer and consumers incur transaction costs in resale. Consumers decide whether to purchase the new products or wait for the resold ones. We investigate how the existence of consumer resale affects the retailer's return policy and profit. When consumers incur a lower resale transaction cost than the retailer does, the retailer does not offer any return, but it can benefit from consumer resale for a high product resale value. When consumers incur a higher resale transaction cost, the retailer opts to offer a return policy for a wider range of the product resale value compared with no consumer resale. However, the retailer may suffer from consumer resale especially when the product resale value is moderate. Moreover, contrary to the result that the retailer always benefits from a higher product resale value without consumer resale, we find that the retailer's profit may decrease in the product resale value with consumer resale.