Serving Fraudulent Consumers? The Impact of Return Policies on Retailer's Profitability

Competition in the current marketplace requires businesses to provide consumers with the utmost convenience in purchasing services and goods. Buyers expect that, as an aftersales service and risk reliever, they can “return” goods if they are not satisfied with them. Such product returns significantly influence retailers' profits not only because of a reduction in net sales but also because of increased costs. Despite its substantial impact, research focused on retailer–consumer return policies has been limited. To fill this gap, we study a retailer that has to set the product return policy parameters—specifically, the price and the return period. The impact of these parameters on consumers' valuation function is also taken into account. We study the model analytically and provide insights through various numerical examples. We find that even with fraudulent consumers' negative effect on sales, a retailer could expect both its profits and prices to increase with an optimally determined return policy. We also find that a retailer that operates in an environment where consumers are not sensitive to return policies should be cautious when setting the return period.