Pricing of Complementary Products in Online Purchasing under Return Policy

Ata Allah Taleizadeh,Shima Rezvan Beydokhti,Somayeh Najafi-Ghobadi,Leopoldo Eduardo Cárdenas-Barrón

doi:10.3390/jtaer16050097

Abstract

In online purchasing, customers may return products due to dissatisfaction with the quality of the product, and receive a refund based on the return policy, which is determined by online distributors. Online distributors can offer generous policies to attract more customers, but at the cost of reducing total profits. In this paper, the effect of the pricing and quality of complementary products (products sold together with other items) in online selling under the return policy is investigated. For this purpose, a mathematical model is developed to obtain optimal values for selling price, refund amount, and quality of products. Based on analytical results, a solution algorithm is proposed to solve the numerical examples and perform sensitivity analysis. Findings reveal that, while increasing the sensitivity of demand with respect to the refund amount, the price, quality, and refund on returned products should be increased. In addition, the online distributor should increase the quality of products when customers are more sensitive to the quality of products. Among other results, the selling price is shown to be negatively affected by demand elasticity with respect to price. In this situation, the online distributor should reduce the quality level and the refund amount for returned products to avoid a sharp decline in profit. In addition, when the quality cost is high, the price and quality should be decreased and the refund amount unchanged.

Highlights

According to an Invesp infographic, the return rate in online purchasing is at least 30%, whereas it is lower than 9% in physical purchasing
We propose a mathematical model to determine the optimal pricing and product quality of complementary products in online purchasing under the return policy
This paper focused on the pricing and quality of complementary products in online selling under a return policy

Summary

Introduction

Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. Returning products from customers to vendors is a regular activity in many industries. E-shopping, the vendors inform their customers of a product’s details (i.e., quality, appearance, usage, time of delivery, among other characteristics) via a webpage. The buyers decide to purchase a product based only on the webpage information and their needs. In online purchasing the customers do not have access to the physical product when they are purchasing; the return rate is higher than in physical purchases [1]. According to an Invesp infographic, the return rate in online purchasing is at least 30%, whereas it is lower than 9% in physical purchasing

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