Consumer Search and Product Returns

We study a scenario in which a consumer has uncertain match with a product but can conduct costly prepurchase search to resolve this match. The firm selling the product jointly decides its price and return policy to maximally extract surplus by strategically managing who bears the cost of resolving the match, and when it is resolved. If the consumer’s search cost is low relative to the firm’s return processing cost, the firm induces the consumer to search and bear the cost of resolving the match before making the purchase decision. However, if search cost is high enough, the firm offers a return policy such that match is resolved after the purchase decision and the firm bears the processing cost of an unmatched returned product. By allowing search to be potentially inconclusive, we show that active search and returning may coexist and, in fact, be complementary such that offering a partial-refund return policy can encourage search and more efficient search can result in more returns due to a more lenient return policy. The firm finds it optimal to add restrictive clauses to the return policy along with offering free returns, and the presence of these clauses induces consumers to resolve match by conducting prepurchase search. In addition to providing novel insights into the interplay between search and returns, our model explains a wide range of pricing and return policies used by firms, and associated search and return behaviors of consumers.