Discussion paper
DP17958 Searching Online and Product Returns
E-commerce has led to a surge in products being returned after purchase. We analyze product returns as resulting from a trade-off between the social waste of returns and the search efficiency gains of being able to inspect a product’s value after purchase. We find that whenever returns are efficient, the market generates too few returns as the parties involved in the transaction do not internalize the welfare benefit of consumers continuing their search, generating profits for other firms. We also show that, despite their consumer friendly appearance and the private cost of returns, firms may benefit and capture the gains from less costly search.
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