The Impact of Consumer Loss Aversion on Returns Policies and Supply Chain Coordination

Abstract

Productreturnisacommonafter-saleservice.Existingliteraturehasassumedlossneutralconsumers, whileinpracticeconsumersareoftenmoresensitivetoutilitylossesthangains,i.e.,customersare oftenlossaverse.Inthispaper,westudytheimpactofsuchlossaversionontheretailer'soptimal pricingandreturnspolicies.Weanalyzethreescenarioswheretheselleroffersnorefund,fullrefund andpartialrefundforthereturnedproducts.Undereachscenario,thesellerdeterminestheoptimal price,quantity,andrefundamount(underpartialrefundcase)inordertomaximizetheexpected profit.Ourresultsdemonstratethatconsumerlossaversionleadsano-refundretailertochargelower priceandordersmallerquantity,hasnoimpactonafull-refundretailer,andresultsinamorelenient returnspolicyforapartial-refundretailer.Wealsofindcontractsthatcoordinatesupplychainsselling tolossaverseconsumers.Therefore,thisarticleshedssomelightsonhowthemanagementofreturns policiesshouldbeadaptedwhenconsumersarelossaverse.

Signaling Quality with Return Insurance: Theory and Empirical Evidence

“…More recently, Najafi and Duenyas (2018) evaluate profit advantage of a new return policy, where consumers are offered an option to forgo full refund for returns in exchange for a price discount. Samatli et al (2018) examine return policies under consumer loss aversion. Hwang et al (2020)a n d Nageswaran et al (2020b) study return partnerships that enable online retailers to offer offline product returns.…”

Taking stock of consumer returns: A review and classification of the literature

“…On the returns acquisition side, Su () shows how an arrangement where consumer returns are collected directly by a manufacturer instead of a retailer can be used to achieve supply chain coordination in a supply chain with consumer returns. Samatli‐Pac et al () show that the findings in Su () are robust with respect to customer loss aversion. Chen and Bell () study a retailer's decision to offer a returnable, non‐returnable, and dual‐channel for the reverse flow of products, characterized by an MBG adoption decision.…”

“…Whereas, customers' risk aversion and high retail costs favor mbg adoption and in this case, the retailer's profit does not get affected by the degree of risk aversion. As suggested in Su (2009), Samatli-Pac et al (2018 show that when customers are loss averse in addition to being risk averse, the optimal refund amount increases above the unit salvage value.…”

“…Su () finds that with homogeneous customers, the optimal refund amount is equal to the salvage value, whereas heterogeneity in valuations results in more lenient refund policies. Samatli‐Pac et al () demonstrate that in the case of loss‐averse customers, a retailer would offer a refund that is greater than the salvage value. Xu et al () find that if the salvage value is smaller than the lower bound of customer's product valuation, the optimal refund amount should equal the lower bound, not the salvage value.…”

“…Two different contracts are proposed as a remedy to the coordination problem, and their effectiveness is analytically demonstrated. Samatli‐Pac et al () show that the contracts proposed in Su () can still coordinate the supply chain when customers are loss averse. Xiao et al () employ a demand model in which demand is sensitive to the refund amount to study a similar coordination problem and characterize the terms of a buyback contract that can coordinate the supply chain.…”