When to carry eccentric products? Optimal retail assortment under consumer returns

To understand whether retailers should consider consumer returns when merchandising, we study howthe optimal assortment of a price-taking retailer is influenced by its return policy. The retailer selects itsassortment from an exogenous set of horizontally differentiated products. Consumers make purchase andkeep/return decisions in nested multinomial logit fashion. Our main finding is that the optimal assortmenthas a counterintuitive structure for relatively strict return policies: It is optimal to offer a mix of the mostpopular and most eccentric products when the refund amount is sufficiently low, which can be viewed asa form of risk sharing between the retailer and consumers. In contrast, if the refund is sufficiently high, orwhen returns are disallowed, optimal assortment is composed of only the most popular products (a commonfinding in the literature). We provide preliminary empirical evidence for one of the key drivers of our results:more eccentric products have higher probability of return conditional on purchase. In light of our analyticalfindings and managerial insights, we conclude that retailers should take their return policies into accountwhen merchandising.

Consumer Advisory Bulletin, Health Privacy Act Takes Effect April 14, April 2003

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Consumer Advisory Bulletin, Tips for Buying a Used Car, June 2007

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Consumer Advisory Bulletin, Rapid Tax-Refund Loans A very costly way to gain just a few days on tax refunds, January 2008

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Consumer Advisory Bulletin, Con-artists cash in on people's false hopes and wishful thinking, August 2007

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Consumer Advisory Bulletin, Prevent Home Repair Scams and Disputes, May 2007

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Consumer Advisory Bulletin, Prevent Home Repair Scams and Disputes, May 2007

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Consumer Advisory Bulletin, Sweepstakes Mail Threatens Older Iowans, April 2007

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Consumer Advisory Bulletin, Alert: Consumer Scams after Storms or Floods, August 2007

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Consumer Advisory Bulletin, How to Choose a Cell Phone Plan That Works Best for You, May 2006

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Consumer Advisory Bulletin, Avoid Car-Title Loans, December 2005

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Consumer Advisory Bulletin, Prevent Identity Theft, July 2007

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Consumer Advisory Bulletin, Gift Card Fact Sheet – and Tips for Consumers, December 2007

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Consumer Advisory Bulletin, The "Right-to-Cancel" Law - Know Your Rights!, May 2006

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