Advance Selling with Part Prepayment and Consumer Returns

Part prepayment scheme can induce more consumers to purchase the product in advance but may also lead to the increase in consumer returns. This study develops a two-period theoretical model to examine the interaction between the part prepayment scheme and the return policy and its effect on the retailer’s profit. Our analysis yields the following insights. First, part prepayment scheme can help the retailer to increase the demand without sacrificing the advance selling price. Second, the prepayment proportion and the consumers’ hassle cost of return have a negative cross effect on the retailer’s profit, which indicates that when the consumers are allowed to preorder the product with a relatively low proportion of prepayment, the retailer should impose more restrictions to increase the consumers’ hassle cost of return. Third, the prepayment proportion and the ex-ante product information perceived by consumers also have a negative cross effect on the retailer’s profit, which indicates that the retailer should consider the degree of product information disclosure when adopting the part prepayment scheme. We also extend the model to incorporate the retailer’s handling cost of consumer returns and find that it is beneficial for the retailer to require a full prepayment when the handling cost is relatively high.