Optimal Trade-in Return Policy Decision Based on Numerical Simulation

Abstract

In order to retain existing customers and drive sales, firms introduce trade-in programs where participating consumers (referred to as trade-in consumers) have the option to return and request a refund for newly purchased products if they are dissatisfied. This study utilizes two mathematical analytical models and numerical simulation analysis to investigate the viability of implementing a trade-in return policy for trade-in consumers.Our findings indicate that when the hassle cost associated with consumer returns is low, implementing a trade-in return policy leads to higher profitability for the firm. Conversely, when the hassle cost is high, the firm benefits more from not implementing such a policy. Furthermore, the decision to implement a trade-in return policy is influenced by the product's durability, with higher durability increasing the firm's inclination to adopt such a policy. Lastly, implementing a trade-in return policy contributes to higher consumer surplus.