A search model of costly product returns

Abstract

This paper analyses a market in which consumers buy horizontally differentiated products without knowing their exact valuations. By paying return costs, the consumers may return less-preferred items and obtain refunds. The consumers shop sequentially and their shopping strategy is similar to the search strategy of a consumer in a sequential costly search model. Thus, the pricing strategies of firms are identical to those in a price-directed sequential search model. Price competition is more intense, and the symmetric equilibrium price is lower when returns are costlier. As a result, consumer surplus is increasing in the return cost.