Optimal Return Policy of Competitive Retailers’ Pre-Sale Products Based on Strategic Consumer Behavior

Abstract

Because of incomplete information on pre-sold products, consumers face uncertainty about the value of what they have purchased, which leads to a mismatch between supply and demand and a large number of returns. By developing appropriate return policies and effectively managing and handling consumer returns, retailers can not only reduce waste but also ensure better resource utilization, which is essential for sustainable development. In this paper, we analyze the full-refund and full-and-freight-refund policies of retailers and develop a game model based on binary competition for selecting the optimal return policy for the pre-sold products of two retailers. The study shows that when both retailers have low capacity, there is no pre-sale stage. However, when their combined capacity is high and exceeds the demand of non-strategic consumers, equilibrium depends on their combined capacity and the proportion of strategic consumers who choose to keep the pre-purchased product under both return policies. When the number of strategic consumers who retain pre-order products is low under the full-refund policy and both retailers have moderate capacity, equilibrium is achieved when an asymmetric return policy is followed rather than a symmetric return policy. Specifically, when the percentage of strategic consumers who keep their reserved products under the product return strategy is small and the capacity of the two retailers is moderate, the maximum benefit is achieved if one of the retailers adopts the policy of a full refund and the other adopts the policy of a full-and-freight refund. Otherwise, when one retailer adopts the policy of a full refund or a full-and-freight refund, its competitor should adopt the same strategy to gain maximum revenue. The research on retailers’ pre-sale and return strategies in this paper helps to optimize the operational strategies and operational processes of e-retailers, further improve the management and decision making of their joint pre-sale and return strategies, and help optimize retailers’ profits.