Refund Policy and Threat of Encroachment with Consumer Behaviors

Abstract

Pre-sale orders enable consumers to purchase products in advance, but they may lead to a high level of consumer returns. Based on consumer behaviors, this study builds a two-stage model comprising an incumbent retailer, a competitor, and strategic consumers under the competitive market or the monopoly market. A competitor has the option of entering and exiting the market during the regular sales period. We study the optimal pricing mechanism of both the incumbent and competitive retailer, analyze the impact of consumers’ choice strategies, competitors’ options on pricing decisions, and the incumbent retailer's performance. Our results imply that when the proportion of strategic consumers is large or consumers’ strategic behavior is strong, the competitor's revenue is high while the incumbent's revenue is low. However, a high proportion of loyal consumers and a flexible price strategy favor the incumbent retailer. And the entry of a competitor has a negative impact on the incumbent retailer.