Return compensation strategy of online retailer for online reviews

Abstract

With the development of the Internet, consumers tend to go online shopping. Online reviews have become an important reference for consumers to make purchase decisions, and they contain reliable and rich information about products and needs that influence consumers’ and companies’ decisions. However, consumers are sometimes unable to accurately judge product quality through online reviews, resulting in the quality of the product not meeting the expectations of consumers. Then, consumers sometimes choose to return products and make negative reviews about the product, which can damage the retailer’s interests. To reduce the damage to profits, online retailers have adopted a return compensation policy. In this paper, we establish a two-stage model based on the retailer’s return compensation policy. Meanwhile, considering the effects of customer returns and online reviews, we construct two scenarios with and without return compensation policies to compare the equilibrium results of the game in different scenarios, and to analyze the effects of online reviews and product mismatch on retailers’ profits. The results indicate that: (1) return compensation compensates consumers for the loss of utility due to product mismatch, promotes positive consumer reviews of that product, and leads to an increase in both product sales and total profits. (2) Product mismatch is negatively associated with the number of positive reviews and positively associated with the number of negative reviews in the case where an online retailer offers return compensation.