EXPRESS: Product Returns and Assortment Decisions: a Strategic Analysis of Online and Offline Competition

We present a model of product returns and assortment decisions in the context of online-offline retail competition. In equilibrium, the online store optimally offers easy-to-fit products to reduce costly returns. The competing brick-and-mortar store faces a subtle trade-off between generating higher sales and attracting more foot traffic, and thus, it might use its limited store size to stock harder-to-fit products. Our model provides a rationale for the prevalence of relatively lower-quality products sold online and the steady growth of specialty stores within the changing footprint of traditional retailing. The model is extended to include possibilities such as a physical store opening an online channel to compete with the online store. We apply this framework to investigate the possibility and consequences of retailers collaborating to handle returns. Specifically, a recent “buy online and return in store” (BORS) return policy allows consumers to return online purchases directly to a competing brick-and-mortar store. In the short run, BORS increases the BMR’s foot traffic and the returns volume. In the long run, BORS expands the OR’s assortment and increases BMR’s foot traffic. BORS can be sustained in the long run if the BMR is small or if its cost-saving effect is large.