Flexible consumer return policies and rising clearance sales in retailing: Can this dual trend co-exist?

We have been witnessing the dual trend of retailers offering increasingly flexible consumer return policies and the rise in clearance sales and the number of off-price clearance channels. We model and connect these two trends by making the salvage/clearance price endogenous and ask the question of whether the retailers can continue to be better off without restricting their return policies, even if they end up with lower clearance prices. Interestingly, compared with a setting with no returns, although the retailers’ clearance price will be lower, we show that they would be better off with flexible return policies when the bargain hunter segment’s valuation heterogeneity is above a certain threshold. We show that this result holds in both store-clearance and the two types of off-price clearance-channel settings in which multiple retailers clear their excess stock through an intermediary. We also show that the expected clearance price in off-price clearance channels is higher than the clearance price in store-clearance setting with and without returns. We believe that these two results jointly explain both trends of offering flexible return policies and the rise in off-price clearance channel business in the retail industry.