E-Tailing with Instant Return Credit

Problem Definition: Many e-tailers recently adopted a new service -- offering Instant Return Credit (IRC), an in-store credit, immediately upon an online return claim, without requiring the return to be received or verified. Improving consumers' temporary budgets, IRC helps resolve the mismatch between products and consumer tastes and thus convert online returns into new sales. However, it is prone to costly fake returns from opportunistic consumers. We take the initiative to study whether and how retailers should adopt IRC and its implications for pricing strategy, profit, and consumer welfare. Methodology/results: We build a stylized economic model to capture the basic dynamics and trade-off of IRC. The model focuses on a retailer selling two horizontally differentiated products, facing consumers with heterogeneity in tastes, budget levels, and fake-return motivation types (genuine or opportunistic). We study and compare three different cases of IRC: no, uniform, and contingent (on consumer type). We find that, depending on product category, the retailer may offer full, partial, or zero uniform IRC to consumers; when making IRC contingent, full credit is offered to genuine consumers and partial/zero credit is offered to opportunistic consumers. To cope with IRC, the retailer should prepare to switch to {\it asymmetric} pricing, although the two products are symmetric (in cost, consumer valuation, and market size); moreover, a higher product cost may lead to a lower price. The value of IRC is higher for products with lower cost, lower consumer valuation for a taste-product mismatch, and a lower proportion of opportunistic consumers, whereas making IRC contingent is more valuable when these measures are intermediate. Finally, IRC may hurt consumers for low-cost products, whereas making it contingent normally rewards genuine consumers and penalize opportunistic consumers. Managerial Implications: Our results provide stakeholders with an initial guidance and insights on the adoption, implementation, and impacts of instant return credit.