Customized Product Return Policies

This paper examines product return policies in an environment in which consumers differ by the return costs they experience themselves and impose on firms. We examine how firms use information about consumer return costs to customize product return payments, prices, and whether to permit returns from particular consumers or even sell to them. We demonstrate that in the three market structures we examine -- monopoly, n-firm Salop competition, and n-firm Bertrand competition -- all firms customize product return payments. Furthermore, in each of these market structures, firms set the same socially-optimal policies with regard to product return payments and the consumers to which they sell and permit returns. While a monopolist customizes prices, firms in each of the oligopolistic markets do not. In fact, in both oligopoly models, the equilibrium prices are the same as in the traditional Bertrand and Salop models. Additionally, and as importantly, we demonstrate that firms have an incentive to reduce the costs that consumers experience (i.e., hassle costs) associated with product returns in monopoly and n-firm Salop competition. In an extension, we show that the inability of a monopolist to price discriminate by consumer type causes inefficiency in product return payments that can lead to excessive, even full-price, refund policies and may also lead to inefficient limits on which consumer segments are served