Assortment Planning in Omni-Channel Retailing under Product Returns and Showcase Capacity

ABSTRACT We investigate the assortment planning decisions of a retailer that operates an online sales channel and a brick‐and‐mortar store. We explicitly investigate the impact of product returns, which is a norm in modern retailing and a factor for lost profit. Assortment decisions affect product returns as showcased products reveal information to online shoppers who visit the physical store before making their purchase. We model customers' purchase and keep‐or‐return decisions through a multinomial logit choice model and derive the retailer's expected profit function. Using analytical and numerical results, we show that (i) if the cost of handling returns is not too high, allowing returns can lead to substantial increase in profit, (ii) an increase in returns does not necessarily mean a decrease in profit, (iii) retailers are generally better off if the hidden attribute levels are slightly undervalued rather than correctly or overvalued, (iv) even if there is shelf‐space capacity available for free, it may be optimal not to utilize it fully, and (v) under a generous refund policy, retailers should reveal a limited number of undervalued levels; whereas, for the overvalued levels, their action depends on relative sizes of the online and offline market segments.