Multichannel retail competition with product returns: Effects of restocking fee legislation

Abstract

Abstract The Internet’s explosive growth enabled new ways to reach customers, but product returns became problematic. Today, most brick-and-mortar stores have either been integrated into or replaced by the online channel. We model the competition among sales channels and analyze its equilibrium structure. We consider two competing retailers and three sales channel configurations—brick-and-mortar, click-and-mortar and strictly online—and derive the conditions under which a Nash equilibrium exists. We rule out product returns in the brick-and-mortar channel, but online purchases can be returned (possibly subject to a restocking fee). Our model allows for repeated returns of an item and its reintroduction into the forward supply chain. We investigate the effect of restocking fees and customer’s perceived channel value on the equilibrium as well as the impact of EU legislation addressing free returns. We also analyze some extensions of the model and conduct a numerical analysis to explore whether restocking fee legislation helps or hinders online business. Our results indicate that the equilibrium structure is determined by the values of the return rate, the refund rate, and the online channel attraction. Also, it results profitable to refurbish and reintroduce returned items into the forward chain multiple times. Lastly, in the context of whether to charge or not a restocking fee and the introduction of a new EU legislation, we can conclude that retailers charging a restocking fee should put more effort in order to increase consumer’s perceived value, meaning that customers will accept a restocking fee provided they view the online purchase as having higher quality than a brick-and-mortar purchase.