Pricing and Customer Returns Policies with Loss Averse Customers

Customer returns policies are common after sale services offered by a retailer in order to boost sales, improve customer satisfaction and diminish customer fit uncertainty. With such a service, the retailer accepts the return of a product after the sale has occurred, if it does not satisfy the customer’s expectations. This paper studies a retailer’s return policy problem when the market consists of loss-averse customers who are more sensitive to losses than gains. We examine the situation in which a seller makes price and quantity decisions and also designs an appropriate returns policy in order to maximize his profit. The seller may offer either a full-refund or a partial-refund policy if he decides to accept returns or chooses not to accept any returns. With the full-refund policy, the seller reimburses the consumer the full price of the product if it does not fit the customer’s preferences. With a partial-refund policy, the seller offers a refund which is strictly less than the purchase price. We assume that customers are strategic customers aiming to maximize her utility of the product. Under this setting, this study analyzes the impact of loss aversion on the seller’s price and order quantity decisions.