Strategic return-exchange promotions with customer loss aversion in omnichannel operations

Omnichannel returns, exchanges, and e-coupon promotions are common in retail practice. However, previous research has not examined how the combination of these three practices affects omnichannel operations. This paper investigates whether used e-coupons can be refunded in customer returns and proposes two strategies: generous return-exchange (GRE) and strict return-exchange (SRE). Additionally, we explore whether return-exchange promotions should be consistent across channels. We analyze all possible outcomes: GG (both channels offer GRE), SS (both channels offer SRE), GS (same-channel offers GRE, cross-channel offers SRE), and SG (same-channel offers SRE, cross-channel offers GRE). Our analysis further addresses how customer loss aversion impacts different assortment promotions. We find three key results. First, we identify two price premium advantage configurations: when consumers perceive higher quality in online products and when the SG model is adopted under high exchange satisfaction rates. Second, when considering loss aversion, optimal assortment promotions depend on consumer-perceived online product quality and cross-selling benefits, with SG and GS models offering competitive advantages. Contrary to conventional wisdom, SG and GS models yield the highest consumer surplus, benefiting both retailers and consumers. Third, we highlight the importance of considering loss aversion in decision-making. If retailers ignore consumer loss aversion, GG and SS models become equivalent. Moreover, not all retailers (varying in product quality, exchange service, and the density of B&M stores) are suited to consider loss aversion when making promotion decisions, especially under different levels of online product disclosure.