Research
Papers
- “Optimal Pricing and Product Returns” with Bart Bronnenberg and Tobias Klein
Abstract: E-commerce has provided consumers with the opportunity to evaluate a product’s search attributes prior to purchase. At the same time, its experience attributes, e.g., personal feel and fit, can often not be fully evaluated online without physical inspection and are only revealed after purchase upon delivery. To offset this difficulty, e-commerce retailers and online marketplaces offer lenient return policies to consumers who feel that the goods they bought disappoint. Using a novel data set of transactions and customer returns at a large online marketplace in the apparel industry, we document that product return rates in the apparel industry are high, ranging from about 5% to about 45% of purchases for a given product. In addition, return rates causally depend on the prices paid. We conceptualize how pricing decisions are affected by returns through (1) return rates, and (2) their dependence on price. Estimating a choice-based model of demand that includes product returns, we show that ignoring product returns severely biases estimates of demand and may lead to incorrect pricing decisions. Incorporating product preferences, (price-dependent) return rates, and return costs in the profit function, we show how to solve for optimal prices. While return costs push prices up by increasing the marginal costs, larger price elasticities of sales net of returns pull prices down. Finally, we show how prices, return costs and profits change in equilibrium.
- “Estimation of Search and Return Costs in Online Markets”
Abstract: I developed an online consumer search model integrated with a product return option. In this model, consumers search product detail pages sequentially. Using the signal match values from the detail pages they visit, they form expectations and select the product that offers the highest expected utility. After receiving the product and discovering the true match values, they decide whether to keep or return it. I explore the relationship between the extended model and the standard sequential search model, a choice model with a return option, and the estimation strategies involved. I analyze the comparative statics of the model and the additional inputs it introduces to enhance seller-side decisions. Utilizing a unique dataset of search, order, and return decisions from a large online apparel retailer, I estimate the proposed model and investigate counterfactual scenarios where there is (i) no return option and (ii) no return cost, including the associated hassle cost, within an environment defined by the estimated parameters.
- “Welfare Implications of Private Labels in Online Marketplaces under Consumer Search”
Abstract: E-commerce platforms have become an integral part of the intermediation process of consumer transactions. They have recently gone beyond mere intermediation and started providing customers with private labels. The attention of regulators is drawn to these platforms, as they have the potential to impair competition with third-party sellers and affect consumer welfare. The theoretical literature claims, especially the steering of customers to the private label during the consumer search, creates a conflict between the interests of the three economic agents: (i) platform, (ii) third-party sellers, and (iii) consumers. I aim to quantify the change in welfare distribution across these three parties under different ownership structures of the online marketplace. In this regard, I compare the price-product assortment equilibria under independent and dual-role platform structures using a sequential search model with realistic search costs associated with positions and demand primitives aligned with empirically observed search and purchase statistics. The simulation employed to compare the equilibria utilizes distributional assumptions from the literature and a heuristic algorithm to determine the otherwise computationally intractable price-product assortment equilibrium. The results suggest that the average position of private label products is 3.5 higher on a webpage listing 15 products, the average purchase price is 10% lower, the profits of third-party firms are 17% lower, the fee revenue and profit of the platform are jointly 4% higher in a dual-role platform compared to an independent platform. Consumer surplus and total welfare decrease at a magnitude equivalent to the total profits of firms in the dual-role case.