Seller-induced scarcity and price-leadership: Impact on product returns in the internet retail supply chain

Abstract

Purpose

The purpose of this paper is to evaluate the interaction between inventory availability (scarcity) and pricing levels (price-leadership (PL)), and its effect on product returns in the internet retail supply chain. Specifically, this paper investigates how supply chain managers can use inventory (seller-induced scarcity) and pricing (PL) levers to control product returns.

Design/methodology/approach

Empirical data of sales and product returns from an internet retailer is analyzed to identify the scale of the effect that product scarcity and PL has on product returns. These factors are considered in developing a sales-return process model which is used with empirical data in a simulation study. The study evaluates changes in product returns for different policy settings related to PL and inventory levels. Findings of the simulation study are validated using statistical analysis of empirical data.

Findings

PL and seller-induced product scarcity affect the rate of product returns; however, the scale of this effect depends on inventory and pricing decisions. The results identify an inflection boundary based on scarcity and PL levels which reverses this effect. This reversal is explained by underlying principles at play regarding buyers’ valuation of the sale and corresponding product attributes.

Practical implications

Supply chain managers in internet retail can leverage lower inventory under the seller-induced scarcity approach to improve revenues. However, reducing inventory levels beyond a threshold is counterproductive, due to an associated increase in product returns. Similarly, setting market competitive prices (PL) can help reduce product returns. Under the seller-induced scarcity condition, this effect is reversed for inventory levels below a threshold. Retailers can implement the methodology developed in this paper to identify the inventory-price threshold that can help increase revenues while keeping the rate of product returns at a manageable level.

Originality/value

This research extends prior work regarding the role of product scarcity and pricing on product returns and develops a deeper understanding of how these factors can be managed to control product returns in the internet retail setting.

Citation

Ishfaq, R., Raja, U. and Rao, S. (2016), "Seller-induced scarcity and price-leadership: Impact on product returns in the internet retail supply chain", The International Journal of Logistics Management, Vol. 27 No. 2, pp. 552-569. https://doi.org/10.1108/IJLM-05-2014-0073