The effect of return and price adjustment policies on a retailer’s performance

Abstract

Product returns cost retailers billions of dollars annually. Consumers return products they are dissatisfied with and may return and repurchase products in order to obtain a discount when temporary price drops occur. In this paper, we analyze the effect of return policies’ durations on retailers who offer periodic discounts and those that do not. We also examine the effects of offering a price adjustment protection policy and its optimal duration. We compare policies in which money-back refunds are given versus those where noncash refunds (e.g., gift cards) are used. We find that using noncash refunds can significantly reduce the cost of providing a return policy and may even make such a policy profitable. We also find that for retailers who already offer consumers periodic price discounts, offering a price adjustment policy with the same duration as the return policy can be optimal and can considerably reduce the cost of the return policy. The later assertion holds even if the price adjustment protection does not lead to an increase in demand.