Impact of return leniency on retailers¿ profit and social welfare in monopoly markets

abstract

© 2022 Elsevier LtdProduct return policies are widely utilized to increase customer security in retail markets. As a result, many retailers take various return leniency measures to ease the applicability of product returns for customers, which increases the frequency of returns in the market and has huge economic impacts on retailers. Therefore, it is necessary to accurately understand the impact of return leniency on both retailers¿ profit and consumers¿ welfare to outline return leniency strategies wisely and maximize profit and social welfare. We present a comprehensive model considering the impacts of major factors influencing customer behavior, such as return leniency, customer heterogeneity, and the endowment effect, in addition to the other frequently researched aspects in the literature (i.e., product expenses, hassle cost, salvage value). Our model calculates the probability of purchasing, keeping, and returning products to demonstrate the impact of return leniency, determining the optimal price and refund levels to optimize the retailer's expected profit and the consumer's loss, and optimizing social welfare. We use a set of numerical experiments over a wide range of parameter values that could cover almost all practical circumstances. Among other findings, our analysis shows that return leniency can be beneficial or detrimental to the retailer depending on the product acquisition cost, endowment effect, and product salvage value, which usually increases social welfare up to some level.