654 / 2024-04-30 10:25:47

Who should provide the subscription of free return shipping: The retailer or the platform?

Subscription of free return shipping; fit uncertainty; competition; third party platform

This paper investigates a new commercial model---the subscription of free return shipping, to solve the problem of product returns.  The subscription of free return shipping is that consumers can access unlimited returns at no cost for an annual fee (Ray 2015).  The provision of subscription of free return shipping can lead to more consumers to switch for a further product trial upon bad fits, as the subscription has resolved the risk of occurring extra returning cost.  This is referred to as the trial-inspiration effect of subscription in this study.  On the other hand, once the subscription is purchased from a particular retailer, consumers would switch to the identical retailer for further trials upon bad fits.  This is called the locking effect of the subscription. Within the locking effect, competing retailers would have little chance to serve consumers switching from their competitors and the market competition is intensified.  With consideration of these effects led by the provision of subscription, we wonder whether it's worthy for competing retailers to provide the subscription of free return shipping in a duopoly market.  Note also that in practise, either the retailer (e.g., NewEgg and Lands' End) or the third party platform (e.g., Return Saver and ShopRunner) may provide the subscription of free return shipping, we wonder who should provide the subscription: the retailer or the third party platform.  We formulate this problem with a Salop model and characterize the equilibrium solution.