The Value of Product Returns: Intertemporal Product Management with Strategic Consumers

Abstract

Consumer product returns are a significant and growing concern in many industries, and firms typically deem returns to be undesirable. Firms may refurbish these returns to recover value, thereby allowing them to extend their product offering over time to new and refurbished products. We study the impact of returns on the intertemporal product strategy of a firm facing forward-looking or strategic consumers, who anticipate future availability and prices of products, and time their purchases to maximize net utility. Using a two-period model, we find that for sufficiently high return rates, the firm not only offers the refurbished product alone in the second period but also refurbishes all of the first-period returns. Importantly, we show that returns may act as a device for the firm to mitigate the well-known time inconsistency problem. Specifically, when the return rate is sufficiently high, the firm’s incentive to recover value from returns by refurbishing results in a reduction – and eventually elimination – of the incentive to offer the new product in the second period. Thus, a sufficiently high return rate allows the firm to implicitly commit that the new product will be offered exclusively in the first period, and therefore charge a premium for it. As a result, firm profit could increase with the return rate.