Who Should Set Consumer Returns Policies in Online Marketplaces: Supplier or Platform?

Consumer return convenience is a significant driver of demand as well as costs in retailing. In the marketplace sales model, both, the supplier and the platform/retailer have been observed to make this key decision. We study how the entity responsible for this decision impacts return convenience, commission rates, and profits. We model a two-party marketplace supply chain where the supplier sets the price, and depending on the contract, the retailer (MR contract) or the supplier (MS contract) sets the level of returns convenience. When the commission rate is set exogenously at a low (high) value, the return convenience is higher (lower) under the MS contract. However, when the retailer can optimize the commission rate, the return convenience and the optimal commission rate are always higher under the MR contract. In this case, we show that the two parties are aligned on who should set return convenience when the return rate is high: specifically, the retailer should set the return policy for cheaper products. Using data from two marketplaces operating in these different formats, we validate this theoretical finding. However, we also find that they may not always be aligned on this decision right, even when there are significant differences in their costs of handling returns. In contrast to the initial intuition that the overall supply chain profit is higher when the supplier sets the return convenience (due to more centralized decision-making), we find that it is higher when the retailer retains this decision right and returns are not too prevalent. We also propose contracts that can coordinate the supply chain. Our work is timely given the continued growth of the marketplace business model and increasing consumer returns, and it sheds light on the impact of the different contractual arrangements we observe in practice.