Regulating Product Return Policies : The Trade-off between Efficiency and Distribution

The proliferation of product returns entails substantial financial and environmental costs. Nonetheless, regulators typically restrict firms from charging high fees from consumers who return products, thereby facilitating product returns. To analyze the consequences of such interventions, we consider a market in which consumers have private information on their expected consumption utility. We show that monopolistic sellers have an incentive to trigger inefficiently many returns even without regulation, as low return fees enable them to screen consumers and reap their surplus.Regulators then face a trade-off: upper bounds on return fees exacerbate the inefficiency by causing the seller to trigger even more returns, but also lead to a redistribution of wealth from monopolistic sellers to consumers. This trade-off also arises when consumers have an endowment effect. However, if sellers can induce overoptimistic beliefs about the utility from consumption (e.g. through advertisements), then upper bounds on return fees may also lead to higher social welfare