Managing Returns Policies with Consumer Resale

We consider a retailer selling new products with a returns policy. After consumers purchase products and find them undesirable, they can either return the products to the retailer or resell them individually. Both the retailer and consumers incur transaction costs in resale. Anticipating that the product resale exists in the later period, consumers with heterogeneous valuations decide whether to purchase the new products or wait for the resold ones. We investigate how the existence of consumer resale affects the retailer's optimal returns policy. It is generally believed that the retailer always benefits from a higher product resale value without consumer resale. By contrast, we find that the retailer's profit may decrease in the product resale value when both the retailer and consumers have an option to resell. We also find that the existence of consumer resale may either increase or decrease the retailer's profit. Specifically, the retailer benefits from consumer resale only when consumers incur a lower resale transaction cost than the retailer does and the product has a high resale value. Moreover, the retailer may benefit from a larger resale transaction cost incurred by consumers too. Our results suggest that the retailer should consider a returns policy to manage the resale market as long as it is more efficient in resale than consumers