Omnichannel retailers’ return policy strategies in the presence of competition

Abstract

An increasing number of omnichannel retailers operate physical and online channels and implement various strategies that integrate both channels. For example, some retailers have begun offering consumers the option to purchase online and return items to physical stores if necessary (i.e., buy-online, return-to-physical store (BORP) option). Such cross-channel return policies can be competitive tools while online retail sales continue to grow and return rates from these sales remain high. We investigate the retailers’ strategic decisions on the adoption of the BORP policy from a competitive perspective. In a duopoly setting, we incorporate model elements, including retailers’ price and online return fee decisions and customers’ heterogeneity and forward-looking purchase behavior. We adopt a multistage, non-cooperative game framework and find that the adoption of the BORP policy by one or both retailers can be sustained in equilibrium if the retailers are sufficiently differentiated and when they can recover significantly larger salvage values from items returned in-store than those returned online. Neither retailer offers the BORP option under intense competition and/or when the retailers’ physical channels lose the aforementioned advantages. Furthermore, in the equilibrium with asymmetric adoption of the BORP policy, both retailers are better off compared with that without adoption. However, the retailer who offers the BORP policy is not guaranteed of a larger profit gain than its rival. We provide a systematic explanation for the mechanisms underlying these results and generate further managerial insights by exploring scenarios with free online return service and retailer heterogeneity.