Optimal price, quantity, and return policy decisions of a two-period newsvendor with product reviews

Online retailers (e-tailers) have high product return rates. To decrease product returns and consumers’ purchase risk, e-tailers can increase available product information through product reviews and/or offer money back guarantees (MBGs). We examine the rational expectations equilibrium of an e-tailer selling to myopic and strategic consumers over two periods. By the end of period 1, product reviews become available, providing a signal to strategic consumers who may wait to purchase in period 2. The e-tailer decides order quantity, prices, and return policy. We find that under both no returns and MBG, as strategic consumers’ patience increases, the optimal range of having them purchase in period 2 increases. For low signal accuracy, it is optimal to have strategic consumers purchase in period 1, whereas for high signal accuracy, it is optimal to have them purchase in period 2. However, under no returns and for a low signal accuracy, it may be optimal to have strategic consumers purchase in period 2 if their proportion is medium and they are patient. We also find that as consumers’ patience increases, the range where MBG dominates no returns increases. For heterogeneous signal accuracy among strategic consumers, equilibrium strategies are similar to the homogeneous case, except that when consumers’ patience is low, high heterogeneity allows the e-tailer to price discriminate, making low-signal accuracy consumers purchase in period 1 and high-signal accuracy consumers purchase in period 2. Also, as the proportion of low-signal accuracy consumers increases, price discrimination increases. Therefore, heterogeneity increases profit.