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Consumer return policies in competitive markets: An operations perspective

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  • Tingliang Huang
  • Hang Ren
  • Ying‐Ju Chen

Abstract

The recent literature argues that offering consumer returns, such as money‐back guarantees (MBGs), reduces quality differentiation in competitive markets. We show that this argument does not hold in general. We propose a new certainty‐equivalent approach, which shows that offering product returns only changes the two firms' marginal costs without affecting their quality differentiation. Our proposed approach directly reveals that asymmetry of salvage values may overturn the recent finding that MBGs help the low‐quality firm. Since MBGs only lead to marginal cost reductions, we show that each firm should adopt MBGs in equilibrium irrespective of the competitor's choice. We then examine the role of offering consumer returns in determining the firms' competitive product strategies. We demonstrate that offering MBGs does not directly affect the quality differentiation choices, and discuss the impacts of production technology and consumer valuation.

Suggested Citation

  • Tingliang Huang & Hang Ren & Ying‐Ju Chen, 2018. "Consumer return policies in competitive markets: An operations perspective," Naval Research Logistics (NRL), John Wiley & Sons, vol. 65(6-7), pages 462-476, September.
    • Handle: RePEc:wly:navres:v:65:y:2018:i:6-7:p:462-476
    DOI: 10.1002/nav.21823
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    References listed on IDEAS

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    Cited by:

    1. Zhang, Zhe & Song, Huaming & Shi, Victor & Yang, Shilei, 2021. "Quality differentiation in a dual-channel supply chain," European Journal of Operational Research, Elsevier, vol. 290(3), pages 1000-1013.
    2. Huang, Zongsheng & Huang, Lingchen & Zhao, Yingxue & Meng, Xiaoge, 2021. "Money-back guarantee in the presence of strategic customer behavior," International Journal of Production Economics, Elsevier, vol. 239(C).
    3. Xiong, Hui & Liu, Jie, 2023. "Return insurance in a competitive market: Benefiting the high-quality or low-quality retailer?," International Journal of Production Economics, Elsevier, vol. 255(C).
    4. Gökçe Esenduran & Paolo Letizia & Anton Ovchinnikov, 2022. "Customization and Returns," Management Science, INFORMS, vol. 68(6), pages 4517-4526, June.
    5. Zhang, Yong & Zhang, Sheng Hao & Feng, Haofang, 2021. "The impacts of money-back guarantees in the presence of parallel importation," European Journal of Operational Research, Elsevier, vol. 295(1), pages 170-182.
    6. Chen, Zhongwei & Fan, Zhi-Ping & Zhu, Stuart X., 2023. "Extracting values from consumer returns: The role of return-freight insurance for competing e-sellers," European Journal of Operational Research, Elsevier, vol. 306(1), pages 141-155.

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