Pricing and return strategy for quality differentiated online products

Upon taking into consideration the deep integration of artificial intelligence, entity economy, and the Internet, the quality differences amongst the various products and the heterogeneity in customer expectations regarding the quality of the products has led to regular product returns. Therefore, the quality of the product as well as the return policies that are adopted by the retailers has a major impact on the pricing mechanism of the online products for the platform enterprise. The study is based on the Hotelling model to study the optimal product pricing of two competitive retailers who operate vertically differentiated products and follow different return compensation strategies. The results have shown that when retailers offer return compensation, product prices rise with the level of return compensation but decline as consumers' acceptance of return compensation increases. For retailers selling low-quality products, raising the return compensation amount may result in losses. While a moderate level of return compensation can enhance profits for all retailers, excessive compensation may reduce revenue or even cause losses. This study extends the theory of online product pricing, providing a theoretical and practical basis for the selection and optimization processes used by dual oligopoly retailers who operate with vertically differentiated products.