Design Of Returnless Refunds In Online Retailing

Firms participating in online marketplaces often allow customers to return a product for a full refund. Given the costs associated with reverse product flows, in some cases retailers may benefit from allowing customers to keep returned products while yet obtaining a refund. We analyze the optimal structure of such a refund policy to maximize the firm’s expected profits while considering strategic consumer behavior. We find that the firm’s commitment to such a policy optimally influences the proportion of the return requests that are granted a returnless refund.