Should A Platform Adopt the Refund-Only Policy?

To reduce return friction in online shopping, many e-commerce platforms now allow consumers to receive a full refund without returning the product. While this refund-only policy enhances the consumer experience, it also raises concerns about unintended impact on retailer profitability. We develop a game-theoretic model under information asymmetry to examine the welfare implications of the refund-only policy and characterize when platforms should adopt it. Our analysis reveals a unique downside of the standard free-return policy: it creates a trade-off between the value-based screening and quality-revealing roles of pricing, prompting high-quality retailers to distort prices as a costly signal and suboptimally exclude low-valuation consumers. A platform should adopt the refund-only policy to correct this distortion, thereby improving pricing efficiency and achieving a Pareto improvement. Our findings also offer guidance on tailoring refund leniency based on product category characteristics and shipping costs.