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Return policies, market outcomes, and consumer welfare

Author

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  • Tatyana Chesnokova

Abstract

The effect of return policies on market outcomes is studied in a model where consumers differ in their valuations of time. Product reliability is identified with defect rates. Producers first choose reliability levels and then compete in prices. For given defect rates, allowing returns makes products closer substitutes, enhancing competition and reducing prices. Being closer substitutes makes higher reliability less worthwhile, which reduces reliability. While the decrease in reliability reduces consumer welfare, the decrease in prices raises it. The latter dominates, so that aggregate consumer welfare increases with return policy.

Suggested Citation

  • Tatyana Chesnokova, 2007. "Return policies, market outcomes, and consumer welfare," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 296-316, February.
    • Handle: RePEc:cje:issued:v:40:y:2007:i:1:p:296-316
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    Cited by:

    1. Pei, Zhi & Paswan, Audhesh & Yan, Ruiliang, 2014. "E-tailer׳s return policy, consumer׳s perception of return policy fairness and purchase intention," Journal of Retailing and Consumer Services, Elsevier, vol. 21(3), pages 249-257.
    2. Yan, Ruiliang & Pei, Zhi, 2019. "Return policies and O2O coordination in the e-tailing age," Journal of Retailing and Consumer Services, Elsevier, vol. 50(C), pages 314-321.
    3. Dmitry Lubensky & Eric Schmidbauer, 2020. "Free Product Trials: Disclosing Quality And Match Value," Economic Inquiry, Western Economic Association International, vol. 58(4), pages 1565-1576, October.
    4. Joaquín Coleff, 2020. "Can consumer complaints reduce product reliability? Should we worry?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 74-96, January.
    5. Kim, Junyong & Wansink, Brian, 2012. "How Retailers’ Recommendation and Return Policies Alter Product Evaluations," Journal of Retailing, Elsevier, vol. 88(4), pages 528-541.
    6. Matsui, Kenji, 2010. "Returns policy, new model introduction, and consumer welfare," International Journal of Production Economics, Elsevier, vol. 124(2), pages 299-309, April.

    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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