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: In this study, I propose a structural model incorporating a return option as a way to the precise discovery of match value following the consumer search literature. I examine the conditions for the identification of the model and suggest an estimation method that separately identifies search and return (hassle) costs. In the model, consumers search product detail pages sequentially according to Weitzman’s rule. Based on the signal matching value they get from the detail page, they form expectations and order the product with the highest expected utility. Finally, they decide whether to keep or return the item. The estimated parameters can be used to discover true price elasticities and develop policies to reduce product returns. The paper summarizes the related managerial implications of the returns within a search framework and proposes a price discrimination strategy to improve total social surplus.
- “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. Recently, they go beyond mere intermediation and started to provide private labels to customers as well. The attention of regulators is drawn to these platforms as they have the potential to create competition-related issues with third-party sellers. The theoretical literature claims, especially the steering of customers to the private label during the consumer search process creates a conflict between the interests of the consumer, the platform, and the third-party sellers. Using a sequential search model with realistic search costs associated with positions, and demand primitives from the literature, I aim to quantify the change in the distribution of welfare across three parties: (i) platform, (ii) third-party sellers, and (iii) consumers under different modes of ownership structures in an online marketplace. This answers the question of to what extent the dual role of the platform affects welfare outcomes.