Commission, product quality and return policy in agency selling

Abstract Many sellers provide products for consumers directly on online platforms. This selling format is labeled “agency selling.” In this article, we investigate the platform's contract design and the seller's quality and return decisions in the agency selling. We find that the platform chooses a high commission rate to induce the seller to accept returns when the salvage factor is large enough or the consumers' willingness to pay for quality is sufficiently low. Compared to the direct channel, the seller is more likely to accept returns in the agency selling. Moreover, if the consumers' willingness to pay for quality increases, the platform intends to reduce the commission rate to induce the seller to increase the quality. The commission rate makes no influence on the generosity of the refund. However, when the consumers' willingness to pay for quality is sufficiently large, the platform prefers the seller to offer no refund and the commission rate may increase in the consumers' willingness to pay for quality. Finally, we consider two extensions: quality affects satisfaction probability and return window.