Return policies, market outcomes, and consumer welfare

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Abstract

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.

Original languageEnglish
Pages (from-to)296-316
Number of pages21
JournalCanadian Journal of Economics
Volume40
Issue number1
DOIs
Publication statusPublished - 2007 Feb
Externally publishedYes

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ASJC Scopus subject areas

  • Economics and Econometrics

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