Author: Julia OttePublisher:
ISBN:
Category :
Languages : en
Pages : 0
Book Description
Online retailers can adopt generous return policies to entice customers to buy and try new products. In this paper we show how an online retailer can utilize product returns to segment customers based on their individual valuations of a product, and therefore to engage in profitable third-degree price discrimination for future sales. We derive the optimal dynamic pricing strategy, including a potential fee for product returns (restocking fee), which balances the benefits from effective customer segmentation and the costs associated with product returns. Strategic customers, who understand that their return decisions affect future prices, may choose to return the product even when their valuations exceed the initial price. To curb strategic returns, which compromise the effective segmentation of customers and therefore the profitability of future price discrimination, it is optimal for the retailer to reduce the initial price of the product and charge a higher fee for returns. We also derive conditions so that a retailer overcharges customers for product returns (i.e., the return fee exceeds the actual cost of a return). This allows the retailer to extract surplus from customers who have low product valuations and return the product, and is therefore a form of third-degree price discrimination.
