Journal article
Product Returns, Customer Segmentation, and Dynamic Pricing in the Online Retail Market
Journal of economics & management strategy, v 34(4), pp 899-917
01 Nov 2025
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Abstract
ABSTRACT
Online retailers can adopt generous return policies to entice customers to buy and try new products. In this article, we focus on the learning aspect of product returns and show how an online retailer can utilize returns to segment customers based on their individual valuations of a product. We derive the optimal dynamic pricing strategy, including a potential fee for product returns (restocking fee), which balances the benefits from effective customer segmentation and the costs associated with product returns. Strategic customers, who understand that their return decisions affect future prices, may choose to return the product even when their valuations exceed the initial price. To curb strategic returns, which compromise the effective segmentation of customers, it is optimal for the retailer to reduce the initial price of the product and charge a higher fee for returns. We also identify conditions so that it is optimal for a retailer to overcharge customers for product returns (i.e., the return fee exceeds the actual cost of a return). This allows the retailer to extract surplus from customers who have low product valuations and return the product, and is therefore a form of price discrimination.
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Details
- Title
- Product Returns, Customer Segmentation, and Dynamic Pricing in the Online Retail Market
- Creators
- Julia Otte - Queen's UniversityKonstantinos Serfes - Drexel University, Economics (School of Economics)Veikko Thiele - Queen's University
- Publication Details
- Journal of economics & management strategy, v 34(4), pp 899-917
- Number of pages
- 19
- Grant note
- The study was supported by the Social Sciences and Humanities Research Council Canada (SSHRC).
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:001408183200001
- Scopus ID
- 2-s2.0-85216325320
- Other Identifier
- 991022024211104721
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- Collaboration types
- Domestic collaboration
- International collaboration
- Web of Science research areas
- Economics
- Management