Selling with money-back guarantees: The impact on prices, quantities, and retail profitability

Abstract

In this paper, we consider a retailer adopting a "money-back- guaranteed" (MBG) sales policy, which allows customers to return products that do not meet their expectations to the retailer for a full or partial refund. The retailer either salvages returned products or resells them as open-box items at a discount. We develop a model in which the retailer decides on the quantity to procure, the price for new products, the refund amount, as well as the price of returned products when they are sold as open-box. Our model captures important features of MBG sales including demand uncertainty, consumer valuation uncertainty, consumer returns, the sale of returned products as open-box items, and cons..