The impact of abusing return policies: A newsvendor model with opportunistic consumers

Consumers may return a product for a variety of reasons, such as the product having the wrong color or size, having poor functionality, being damaged during shipment, or simply prompting regret for an impulsive purchase. Retailers generally provide lenient return policies not only because they may signal high quality but also because they act as risk relievers for consumers’ purchasing decision processes. However, increasing product returns have become particularly challenging for the efficient management of inventory. As such, at the crux of a holistic inventory model lies the understanding of consumer return behavior. In this study, we introduce a variant of the classical single-period inventory (newsvendor) model with returns, in which heterogeneous consumers decide, based on their post-purchase valuation of the product, whether to return the product after using it. From the perspective of the retailer, such deliberate returns may abuse the return policy, which in turn may exacerbate reverse logistics and environmental costs. To that end, we incorporate demand uncertainty and consumer valuation uncertainty by explicitly gauging return probabilities and differentiated salvage values into a newsvendor model. We derive analytical results for the profit-maximizing order quantity for a single-period product that comes with a retailer return policy and exclusively identify the impact of return type as abused or normal. Also offered are closed-form optimal solutions in the cases where market demand is exponentially or uniformly distributed. Structural and numerical results lend managerial insight into how optimal ordering amount, profit, return rates and salvage values change with the price, return window, and hassle cost of returning the product.