Abstract
We investigate the conditions under which a benevolent regulator should set an upper limit on fees that sellers charge for returned products. Our first main insight is that regulatory intervention is useful only when the frequency of post-purchase dissatisfaction is low while the degree of dissatisfaction is high. Otherwise, the fees charged by companies may well be below the socially optimal ones. In addition, demanding lower fees may backfire as they lead to higher sales prices. Second, we find that the optimal regulatory policy starkly depends on whether consumers have neoclassical standard preferences or are subject to loss aversion. Regulations are welfare-enhancing if consumers are, at the point of purchase unaware of their loss aversion or underestimate the return fee. Our results suggest that a detailed legal approach may be superior to existing legal policies, which diverge between different countries but often entail wide and general rules.
Becher, Shmuel I and Feess, Eberhard and Sarel, Roee, The Law and Economics of Product Returns: Regulating Return Policies with (and without) Behavioral Consumer Preferences (December 7, 2018).
First posted 2018-12-21 07:16:37
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