International Journal of Production Economics

Volume 144, Issue 2, August 2013, Pages 451–460

Examining relationships between the return policy, product quality, and pricing strategy in online direct selling

Yongjian Li^a, Lei Xu^b, ^a,  , , Dahui Li^c

a China Academy of Corporate Governance, Business School, Nankai University, Tianjin 300071, China

b School of Management, Tianjin University of Technology, Tianjin, Xiqing 300384, China

c Labovitz School of Business and Economics, University of Minnesota Duluth, Duluth, MN 55812-2496, USA

http://dx.doi.org/10.1016/j.ijpe.2013.03.013, How to Cite or Link Using DOI

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Abstract

In online direct selling, a customer will not experience the product when making the purchase decision. Concerns about product quality and the return policy may prevent the customer from buying the product. In this paper, we develop several theoretical models to examine the impact of online distributor's return policy, product quality and pricing strategy on the customer's purchase and the return decisions. We categorize customers based on their purchase and return behaviors and discriminate distributors based on whether they position their strategy as cost- or price-driven. We find that decisions about the return policy are mutual and complementary with product quality and pricing strategies. In addition, we study direct distributor's pricing strategy, the return policy and the quality policy in four scenarios. The scenarios include situations where customer's demand is sensitive to price or the return policy, as well as where return is sensitive to the return policy or quality. Further, a special case with full refund is analyzed. Finally, we provide a numerical example to simulate the effects of demand sensitivity and return sensitivity on distributor's decisions and profits.

Keywords Supply chain management; Product returns; Online selling; Product quality; Pricing decision