Competing with customer returns policies

Return of products purchased by customers is a common phenomenon in the retail industry and results in costs to retailers. In practice, most retailers implement a full-refund policy, but the terms of customer returns policies vary. A customer returns policy serves as a post-customer service, and is a determinant factor in the customer's decision to purchase the product, in addition to other factors, such as the price of the product. In this paper, for competing retailers who face customer returns, competition from multiple retailers and uncertain customer valuations of the product, we develop a model to examine when retailers can survive and what pricing strategy they should implement in a competitive market. We identify the co-existence conditions for multiple retailers and the existence conditions of a Nash equilibrium among competing retailers. We also show the impact of customer returns on the retailers' pricing and market share, as well as on profits in a competitive market. Numerical examples are included to illustrate the major results discussed in the paper.