Product return management through promotional offers: The role of consumers’ loss aversion

The performance of recovery activities in a circular economy is primarily driven by an effective and efficient acquisition process for used products. This study focuses on uncovering the role of consumer behaviour in designing an appropriate product recovery framework. Drawing insights from prospect theory, where a consumer would react more severely to losses than gains, we develop a probability function to model consumers' willingness to accept a promotional offer as a function of the discount offered to them on returning their used products. The developed model captures the loss aversion characteristic of consumers by incorporating their budgeted price for a new product and the deviation of the actual price from the budgeted price. The propositions suggest that experiencing a higher deviation of the actual price from the budgeted price increases the likelihood of consumers accepting the promotional offer. However, the result reverses if the absolute deviation crosses a threshold value. These propositions have been validated through empirical analysis of experiments conducted with 500 participants. Further, an analytical model is developed to determine the optimum discount to be offered to consumers to return their used products, to minimise the cost of collecting used products through promotional offers. The analysis shows a trade-off between the incentive offered through promotion and the penalty cost for not satisfying government regulations. Overall, this study's findings aid in framing an effective incentive mechanism that could be used by decision makers to improve the performance of the product return management process.