Multi-product Consumer Return Policy : The Impact of Salvage Values

We develop a model of multi-product consumer return policy for firms selling multiple products to customers with uncertain valuations. Customers observe their valuations of the products upon purchase, and depending on the return policy, they can return one or many products for a refund. The firm salvages returned products, and there are potential economies or diseconomies of scale in salvage values. We propose mixed bundling for firms to sell these products, mixed return as the refund policy, and build a unified framework that combines both forward and reverse logistics. We analyze two special refund policies subsumed by the mixed return policy, separate return and bundled return, which parallel those ideas in the product bundling literature, and show that the separate return policy outperforms the bundled return policy when there are no economies of scale in salvage values. We explain our finding by identifying a novel interplay between the valuation effect that arises due to the refund policy and reduced valuation dispersion that results from product bundling.We demonstrate a simple form of the optimal mixed return policy that holds under rather general conditions: the optimal refunds of returned products are set precisely equal to their salvage values. We illustrate that the presence of strict economies or diseconomies of scale in salvage values is the key to the unfailing superiority of the mixed return policy, and provide concrete operating regimes in which this policy reduces to separate return, bundled return, or a tied return policy in which there exists a prominent product that can be returned alone, and all other products are not returned unless in conjunction with the prominent product. We also investigate a market with a mix of customers that differ in their information structure, and show that information transparency to some customers will lower the firm’s refunds to returns and reduce the firm’s profitability