When to carry eccentric products? Optimal retail assortment under consumer returns
AbstractTo understand whether retailers should consider consumer returns when merchandising, we study how the optimal assortment of a price-taking retailer is influenced by its return policy. The retailer selects its assortment from an exogenous set of horizontally differentiated products. Consumers make purchase and keep/return decisions in nested multinomial logit fashion. Our main finding is that the optimal assortment has a counterintuitive structure for relatively strict return policies: It is optimal to offer a mix of the most popular and most eccentric products when the refund amount is sufficiently low, which can be viewed as a form of risk sharing between the retailer and consumers. In contrast, if the refund is sufficiently high, or when returns are disallowed, optimal assortment is composed of only the most popular products (a common finding in the literature). We provide preliminary empirical evidence for one of the key drivers of our results: more eccentric products have higher probability of return – conditional on purchase. In light of our analytical findings and managerial insights, we conclude that retailers should take their return policies into account when merchandising.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1272.
Date of creation: Apr 2011
Date of revision: Nov 2012
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Web page: http://www.econ.upf.edu/
assortment planning; product variety management; product returns; nested logit;
Find related papers by JEL classification:
- M11 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Production Management
- M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing
- L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
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