Returns Policy and Anticipated Regret

ABSTRACT Restrictions on returning an undesirable purchase may make consumers feel regret, and they may account for such a potential postpurchase regret when selecting products. This paper incorporates regret‐averse consumers into a model of returns policy and compares two policies—a returns policy (which allows consumers to return undesirable purchases) and a no‐returns policy (which restricts consumer returns). We explore a canonical shopping setting where the no‐returns policy makes mismatched products unreturnable and triggers postpurchase consumer regret, whereas the alternative policy avoids such regret. Intuitively, one would expect businesses to not use the no‐returns policy when consumers can anticipate regret. Our stylized analytical model, however, shows that the no‐returns policy is not optimal unless it induces regret. In addition, contrary to conventional wisdom on competition in a vertically differentiated market, our results show that the no‐returns policy may be related to conceding a high‐quality advantage—that is, where a higher‐quality firm would charge a higher price, earning a higher profit. Essentially, to raise profit, the no‐returns policy serves as an instrument (through anticipated regret) by deliberately repositioning consumers' perceived quality to a lower level. Our results also show that consumers' regret intensity has an inverted‐U‐shaped relationship with profitability. In addition, we have examined the cases of firms and consumers incurring costs when dealing with returns, repurchasing after returning, and a strategic platform which decides the returns policy; and these analyses help highlight the robustness of our basic model. Echoing the long‐noted sentiment from industry experts and academics that, after products are introduced in the market, changing consumers' perceptions of those attributes is admittedly easier than altering actual product characteristics, our analysis suggests an approach to alter perceptions via the choice of a returns policy.