The competitive role of returnless refunds in an E-commerce duopoly

The returnless refund policy, which allows consumers to obtain a full refund without returning unsatisfactory products, has become increasingly prevalent in online retailing. Despite their operational appeal, little is known about how such policies shape competitive outcomes when retailers differ in the probability of a consumer finding a good fit and thus being satisfied with the product, which is formally defined as product–consumer fit. This study develops a game-theoretic model of an e-commerce duopoly in which two competing retailers strategically choose between a conventional return-with-refund policy and a returnless refund policy. The results reveal that the adoption of the returnless refund policy consistently leads retailers to increase equilibrium prices, but its profit implications critically depend on the product–consumer fit. Retailers with a relatively low product–consumer fit benefit from the adoption of returnless refunds, as this policy mitigates their competitive disadvantages and can exert downward pricing pressure on rivals. In contrast, retailers with a high product–consumer fit adhere to conventional return policies to preserve their competitive advantages. The resulting return policy game yields various equilibrium outcomes. Returnless refunds emerge only when the product–consumer fit of both retailers is relatively low, whereas differentiated return policies appear when product–consumer fit differs significantly. We further demonstrate numerically that returnless refunds do not necessarily increase consumer surplus and may reduce consumer welfare through higher prices despite the elimination of return frictions. However, a blanket prohibition on returnless refunds can also harm consumers when product–consumer fit is poor. This study provides novel insights into the strategic role played by returnless refund policies in competitive e-commerce markets and offers guidance for retailers and policy-makers seeking to evaluate the economic and welfare implications of such policies.