The retail long game: expanded service or extended return?

Abstract

Purpose This paper aims to investigate the diverse strategies employed by retailers in the context of service provision, return policies and pricing to answer pertinent questions regarding a retailer's incentives to offer varying levels of service and return policies and outline the impact of these choices on retailer profitability. Design/methodology/approach We develop an analytical model featuring two competing retailers in a market with heterogeneous consumers, incorporating freeriding behavior and incomplete market coverage. Over two periods, we derive the optimal prices, service levels and profits and explore the impact of firm and market characteristics on service provision and return policies. Findings In markets with high return rates and low service freeriding, high-service retailers benefit from shorter return windows and a focus on the provision of product information, while low-service retailers prefer longer return windows to leverage demand from consumers seeking return flexibility. In markets with lower returns and pervasive service freeriding, high-service retailers should offer longer return windows to attract consumers who value return flexibility, while low-service retailers should choose shorter return windows and leverage the informational benefits arising from freeriding. Originality/value The current research is the first to model information provision, return policies, consumer heterogeneity, service freeriding and retail competition to understand how different types of retailers should make decisions on offering expanded service or extended returns. From a managerial perspective, understanding how consumers trade off obtaining product information and valuing generous return windows can enable retailers to fine-tune their targeting and increase profitability.