Optimizing price, order quantity, and return policy in the presence of consumer opportunistic behavior for online retailers

Keywords Pricing; Return policy; Wardrobing; Store credit and gift card refund Highlights * We develop a model for optimizing price, quantity, and terms of the return policy. * We incorporate consumer opportunistic behavior (wardrobing) in a newsvendor setting. * We examine the implications of using store credit or gift card (SC/GC) refunds. * SC/GC refunds increase the profits of the e-tailer. * SC/GC refunds benefit consumers by increasing quantity available and lowering price. Abstract Product return rates are much higher for online retailers than brick-and-mortar retailers. In this paper, we develop a model for optimizing the retailer's price, quantity, and terms of the product return policy in the presence of consumer opportunistic behavior (wardrobing). We consider a seasonal product and formulate and solve a newsvendor (e-tailer) model where an in-season price markdown may be used before any remaining inventory is salvaged at the end of the season. We compare a return policy in which refunds for returned products are in cash to one where refunds are in store credit or gift cards (SC/GC). Products sold at the clearance (salvage) price cannot be returned or exchanged. We find that with both cash and SC/GC refunds, consumer product match uncertainty, measured by the probability of the product matching consumers' expectations, benefits consumers who keep the product more than consumers who return it. Moreover, under realistic conditions, using SC/GC refund increases the profits of the e-tailer and benefits consumers who keep the product by lowering the price. We also find that even when consumers redeem all SC/GC, using SC/GC refunds can still be beneficial to the retailer because SC/GC refunds deter proportionally more wardrobers from buying than consumers from buying. As a result, costly returns are reduced and the e-tailer benefits. Author Affiliation: (a) The Belk College of Business, The University of North Carolina at Charlotte, Charlotte 28213, USA (b) Rennes School of Business, 2 Rue Robert d'Arbrissel, Rennes 35065, France * Corresponding author. Article History: Received 21 December 2021; Accepted 19 January 2023 Byline: Moutaz Khouja [mjkhouja@uncc.edu] (*,a), Ramzi Hammami [ramzi.hammami@rennes-sb.com] (b)