Multiproduct Firms, Refunds and Product Returns

Many e-commerce retailers adopt strategies that induce consumers to order multiple products at once, inspect their fit at home, and then decide which products to return. These policies introduce a trade-off as they result in consumers acquiring products that better fit their taste, at the expense of the private and social costs associated with products being returned. We determine the conditions under which retailers find it optimal to induce consumers to inspect products simultaneously or sequentially. We also analyze the efficiency properties of market outcomes and state conditions under which inducing simultaneous inspection (surprisingly) leads to fewer returns. An important part of the analysis characterizes the optimal alternative pricing policy that induces consumers to sequentially inspect products after ordering and finds that partial refunds facilitate the extraction of surplus from consumers.