Does platform monopoly power explain easy product returns? (job market paper)
Abstract: We study how the presence of a monopoly platform affects the return fee in online retail markets. Specifically, we ask whether a monopoly platform is incentivized to set the return fee below the cost of processing returns. A seller on the platform can reduce the cost of returns by outsourcing some of the return process to the platform. At the expense of absorbing the return process, the platform requires the seller to set the return fee at the level determined by the platform. The platform charges each seller a joining fee which makes them indifferent between joining the platform and selling directly to consumers. The main result compares equilibrium return fees in two different market settings: with a monopoly platform, and without a monopoly platform. Sellers without the platform compete with each other on return fees as well as on product prices, and thus lower their return fees to attract consumers. However, the sellers' incentive to recoup the cost of returns dominates the effect of competition. As a result, the competitive return fee without the platform is higher than the marginal cost of processing returns, which would be the socially optimal return fee. The platform internalizes the competition between the sellers which drives the return fees down, and imposes an even higher return fee on the sellers than the competitive one. There are two main takeaways from this result: first, the current trend of ``easy returns" is inconsistent with a monopoly platform maximizing profits in the short-run. Second, by setting a higher return fee, a monopoly platform decreases both consumer and social welfare compared to the market without a monopoly platform.
Abstract: This paper examines how the ability of a seller to reveal product match information affects equilibrium price and welfare in a duopoly market. Without any information provided, a consumer must search and check the product before buying it. Pre-search information allows a revealing seller to segment a market into those who are matched and not matched to the revealing seller, and equilibrium prices of both sellers feature an inverted U-shape in search cost. We also discuss welfare consequences of two different information disclosure rules: voluntary and mandatory. Mandatory disclosure minimizes social wastes from excess search and mismatch but maximizes inefficiency caused by under-provision through increased equilibrium price. We show that there is a range of search cost that society is better off with a voluntary disclosure rule while consumer is worse off. Interestingly, consumer surplus is maximized when sellers are forced to provide no information because of resulting low equilibrium price.
Prominence and Optimal Product Design [draft available upon reqeust]
Abstract: This paper examines the effect of the order of consumer search on seller’s choice of product price and design. More specifically, the model examines the effect of “prominence” on seller's optimal product design decision when a consumer, in order to find out the price and matching value of the product, must visit each seller and incur search cost. A consumer first searches prominent sellers with no recall then searches infinitely many “non-prominent” sellers. In addition to price, a seller can also control the distribution of match value between consumers and the seller via product design. Following previous literature, I show that with certain distribution of match value there exists a threshold of the quality of a seller above which prominent sellers choose standard product design and visa-versa. I also show that sellers above a certain quality level try to become prominent when there is an entry fee to apply for a prominent position, and that the optimal product design decision of prominent sellers is affected by the distribution of quality from which they are drawn.