Knowledge that Transforms

In this article, we investigate the interplay between returns policy, pricing strategy, and quality risk. We define quality risk as the possibility of product misfit, defect, or unconformity with the consumers’ perception. These notions of quality risks differ in return policy restriction, residual values, and whether it is possible to unambiguously reduce the probability of mismatch. Using a stylized two‐segment market setting, we demonstrate that consumer returns are offered only when the high‐segment consumers incur a higher hassle cost, and both the quality risk and the valuation of the low segment are moderate. Moreover, it is possible to wisely design the returns policy that eliminates all inappropriate returns. Furthermore, the seller with a high‐quality risk may offer a refund that exceeds the selling price, which provides a theoretical ground and specific operating regime for the satisfaction guaranteed policy used in some e‐tailers. In contrast, when the quality risk is relatively low, further improvement on mitigating the quality risk may not necessarily benefit the seller. Finally, we observe that the restocking fee may be non‐monotonic in product quality; thus, a more generous returns policy does not necessarily indicate a lower quality risk.

Production and Operations ManagementVolume 20, Issue 5 p. 786-786 Call for Papers Special Issue of Production and Operations Management: “Global Supply Chain Risk Management” Haresh Gurnani, Haresh GurnaniSearch for more papers by this authorSaibal Ray, Saibal RaySearch for more papers by this authorYunzeng Wang, Yunzeng WangSearch for more papers by this author Haresh Gurnani, Haresh GurnaniSearch for more papers by this authorSaibal Ray, Saibal RaySearch for more papers by this authorYunzeng Wang, Yunzeng WangSearch for more papers by this author First published: 13 September 2011 https://doi.org/10.1111/j.1937-5956.2011.01283.xCitations: 3Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat No abstract is available for this article.Citing Literature Volume20, Issue5September/October 2011Pages 786-786 RelatedInformation