Consumer Returns: Trash or Treasure Trove

We study the online retail strategy of selling open-box consumer returns side-by-side with new products to customers with heterogeneous preferences. We develop a model to assess the impact of cannibalization of new product demand and the erosion of new product value due to open-box product sales on profitability. We identify the conditions in which selling open-box products is preferred to simply salvaging them through liquidators. The operational decisions are the refund amount for returns and the open-box product price. Surprisingly, we find that when new product value is eroded, any further degradation in value increases both demand and profitability when the probability of return is high. When there is no degradation in perceived value, selling returns as open-box is always more profitable than simply salvaging them, even if they cannibalize new product demand. Furthermore, retailers are able to offer a more generous return policy when new product valuation is eroded by selling open-box products. We also demonstrate that increasing price for new or open-box products does not necessarily lead to a decrease in demand for those products.