Optimal Pricing and Return Policy Design with Social Learning and Wardrobing


Student thesis: Doctoral Thesis

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Award date7 Sep 2018


The rapid development of e-commerce ensures firms pay increasing attention to consumer management: to attracting new customers and retaining existing customers, based on consumer's social learning and wardrobing behavior. In particular, we refer to social learning as the phenomenon involving consumers updating their product quality belief with the information they observe. Thus, review management is an important approach for attracting new consumers. Returns policy is also an effective way to manage consumers. On the one hand, it reduces the risk of new consumers' making mismatched purchases; on the other hand, it eases existing consumers' dissatisfaction with a product. However, some consumers may use the return policy opportunistically for the purpose of short-term consumption rather than for resolving a mismatch; this is referred to as wardrobing behavior. Given the occurrence of wardrobing, product return management is an important issue for firms.

This thesis comprises two essays. The first investigates how a firm should optimize its pricing and surprise bonus strategies in the presence of consumers' social learning. We consider a firm that launches a new product over two periods. Early consumers decide whether to purchase the product based on their intrinsic valuations of it; they also decide what reviews (``like'' or ``dislike'') to post based on their satisfaction with the product. Later consumers update their quality belief about the product with early reviews and then decide whether to purchase. We study two different strategies for the firm: the no surprise bonus provision strategy and the surprise bonus provision strategy. We find that the firm is willing to reduce his selling price or to provide bonus if and only if the social learning intensity is strong enough. In addition, the firm is willing to charge a selling price being lower than his production cost to improve early consumers' reviews under certain conditions. The firm is more likely to adopt action to improve the review scenario with the surprise bonus provision strategy than with the no surprise bonus provision strategy. Moreover, the firm achieves higher profit with the former strategy than with the latter strategy.

The second essay studies the optimal pricing and return policy of a supply chain with one wholesaler and one retailer serving consumers engaging in wardrobing behavior. The retailer orders from the wholesaler, and decides the retail price and the refund to consumers. We consider two kinds of contracts: the wholesale price contract and the buy-back price contract. In terms of the wholesale price contract, the wholesaler decides the wholesale price and the retailer salvages returned products. In terms of the buy-back price contract, the wholesaler decides the wholesale price and the buy-back price for returns to the retailer, and both the wholesaler and the retailer can salvage returned products. We find that consumers' wardrobing behavior benefits both the wholesaler and the retailer. Both may salvage returns by setting the refund higher than their salvage value. Under certain conditions, both the wholesale price and the retail price can be higher under the wholesale price contract than under the buy-back price contract. The retailer's profit and the consumer surplus under the buy-back price contract may be lower than under the wholesale price contract under certain conditions, while the wholesaler's profit under the buy-back price contract is not lower than under the wholesale price contract.

    Research areas

  • social learning, wardrobiing behavior, review management, return management, wholesale price contract, buy-back price contract