Pricing Decisions with Product Return and Consumer Fit Uncertainty

Abstract

When firms introduce new products to the market, consumers usually have product fit uncertainty towards these new products and may not fully understand their characteristics before purchasing them. It is thus prevalent that firms offer product returns in order to mitigate consumers' valuation risk. The objective of this study is to develop a two-period model with product return and investigate how consumers' fit uncertainty and product knowledge affect the firm's decisions and profit. The firm sells new products in the first period and refurbishes the returned products and sells them, along with the new products, in the second period. We find that when more consumers find product fit or when more consumers understand product characteristics, the quantity of returned products will be reduced, the selling prices of the products will be lowered, and the firm's profit will be increased. On the other hand, when consumers have higher product valuation in the second period, the quantity of returned products will be reduced, the first-period selling price of the product will be lowered and the firm's profit will be lowered.