Return Policies, Market Outcomes, and Consumer Welfare

Download or read book Return Policies, Market Outcomes, and Consumer Welfare written by Tatyana Chesnokova and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The effect of return policies on market outcomes is studied in a model where consumers differ in their valuations of time. Product reliability is identified with defect rates. Producers first choose reliability levels and then compete in prices. For given defect rates, allowing returns makes products closer substitutes, enhancing competition and reducing prices. Being closer substitutes makes higher reliability less worthwhile, which reduces reliability. While the decrease in reliability reduces consumer welfare, the decrease in prices raises it. The latter dominates, so that aggregate consumer welfare increases with return policy.