Why Providing Return Policies for Probabilistic Selling

Abstract

Probabilistic selling, whereby the exact identity of a product remains unknown until after purchase. The existing literature on probabilistic selling primarily focus on its attractiveness under the non-refundable condition. In this paper, we aim to study whether probabilistic selling integrated with return policies is still a lucrative marketing tool. This is an important new inquiry because of the prevalence of return policies in E-commerce platforms as well as heterogeneity in consumer preferences occurring in almost all markets. We develop a game-theoretic model to capture the fit uncertainty stemmed from online purchasing and the assignment uncertainty rooted in the stochastic assignment of probabilistic products. We characterize the seller’s optimal pricing and integrated strategies of probabilistic selling and return policies. We find the attractiveness of the probabilistic selling strategy and its return policies depends on the degree of the fit uncertainty and the assignment uncertainty. Counterintuitively, we find that sellers should decrease rather than increase the customer hassle cost of returns. The higher prices of component products are used as an additional lever to suppress customers' return of the probabilistic products. We demonstrate the integrated strategies of probabilistic selling with return policies, as a general marketing tool, can be more valuable than a separate one. The integrated strategies can create a win-win situation, improving both profit and consumer welfare.