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Consumer Return Policies with Multiple Second-hand Markets

Author: LiuXin
Tutor: XieJinXing
School: Tsinghua University
Course: Mathematics
Keywords: consumer returns strategic consumers valuation uncertainty second-hand goods markets
CLC: F274;F721
Type: Master's thesis
Year: 2010
Downloads: 68
Quote: 0
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Abstract

Consider a retailer that sells valuation-uncertainty goods to strategic behavioral consumers, which means consumers are uncertain over the valuation of the goods before purchasing. To provide an“insurance”mechanism the retailer may allow consumers to return their goods. With such return policies consumers have more willingness to pay and can afford a higher price. Besides, the retailer can resell the returned goods as second-hand goods and gain extra profit. But there is also some problems. First, although a high return refund can greatly stimulate consumers’willingness to pay, it will also result in a huge return cost due to buying back the goods from consumers. Second, strategic consumers will take future second-hand goods markets into account when they make consuming decisions, so selling the second-hand goods will cause some consumers to purchase from second-hand markets rather than new goods markets, which may have a negative effect on retailer’s sales volume and marginal profit. Finally, allowing consumers to return the goods may lead to inventory leftovers, if the retailer can not sell all the returns. Because of the above reasons how should the retailer decide his optimal return policy, which involves whether to open up second-hand markets and what the optimal return refund and second-hand goods price should be, is an interesting question. We also consider another common form of second-hand markets, which is electronic peer-to-peer (P2P) markets, where consumers can sell/buy the second-hand goods directly to/from the other consumers. When P2P markets exist, the retailer will have to compete with it for both second-hand goods demand and resource, given that the retailer does enter second-hand markets. We will also take this situation into account.We discuss four models: no second-hand markets, only retailer second-hand markets, only P2P second-hand markets and both second-hand markets (multiple second-hand markets). By finding out and compare the equilibriums, we retrieve following main results. First, opening up retailer second-hands markets is never worse for the retailer than not to do so. When P2P second-hand markets do not exist, the retailer has more motives to open up second-hand markets when marginal wholesale price is high. When P2P second-hand markets exist, the result is opposite. Second, the appearance of P2P second-hand markets usually reduces the retailer’s profit. An exception is when the retailer do not offer any return policies and meanwhile the wholesale price is high. Finally when the wholesale price is high, the retailer will choose to reduce his inventory and stimulates the second-hand market demand, so that the retailer can maintain his profit by selling more units twice. This result holds no matter P2P second-hand market exists.

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