Monday, February 15, 2010

Why Can't I Sell My Right to Return a Product?

Ghostbusters: The Video Game
If you're sure that you're gonna to love the Ghostbusters game for Wii, why can't you promise the store you won't return it and thus be entitled to a discount?

At most stores in America, especially the large chains, we buy with the understanding that we can get a refund or return the product if it doesn't work or doesn't fit. Or for any reason, really.

Why can't I forgo this right and get a discount? If I want to buy a video game from Best Buy--and assume all the risks myself that it won't work or that I won't like it--why can't I sell away my right for a refund? Because Best Buy now would have a higher expected profit from the sale, it should be willing to part with the game at a lower price.

For this analysis, it's crucially important whether handling returns is more of a fixed-cost or a marginal-cost endeavor.

There are fixed costs to setting aside space in the store for a returns department, staffing it, and setting up a computer system to handle the returned items. Inspecting and reshelving the items require resources, but once a staff is in place to do these tasks, each additional item doesn't cost the company more money.

A store also faces marginal costs on each return. A returned item may have to be repackaged. It may have to be refurbished. It may have to be discounted, as it is now somehow fundamentally different from a "new" product.

Whichever of these effects is strongest will determine whether a store would benefit from buying the "no-return" right from customers willing to sell it. If the fixed cost effects dominate, then eliminating the possibility of my one return isn't going to save the company any money. But, on the other hand, if most of the costs are marginal, the store may welcome the reduced chance of having to pay for repackaging or refurbishing.

I wonder if such a policy would suffer from adverse selection. To briefly explain the concept, take an example from the insurance world: among young people, only those most likely to get sick are going to be willing to pay for health insurance. And these are precisely the kind of people that the insurance company wants to avoid insuring. If stores adopted the above policy, only the people most likely to return items will pay for this right. However, it seems that the ability to have the non-returners self-select can make the store more competitive by offering such people a lower price, while assuming all the normal risks with the others (because, of course, most products won't be returned anyway).

An argument could be made that such a system already exists with secondary markets. For instance, instead of buying a book new on Amazon--with all of its guarantees of shipping speed and its liberal return policy--I could save a few dollars by buying the book used and hoping that it will arrive on time and will not have excessive highlights or other defects.

3 comments:

Pamela Stubbart Wilson said...

Just wanted to mention that my dad actually did sell his rights to return recently. He purchased a new Camaro, and the Chevy dealer gave him a $500 cash incentive to waive his right to return under the 60-day satisfaction guarantee.

http://www.gm.com/guarantee/index.jsp?brandId=ch&src=unk

Greg said...

Oh, neat! Thanks for pointing this out.

I guess these kinds of things are more worth thinking about for big-ticket items, when it means $500 instead of 50 cents.

Josh Hattersley said...

XFX, a maker of consumer GPUs, also allows purchasers to transfer their warranty (and possibly the right to return, though I'm not sure). Their "double lifetime warranty" covers the card for both the first and second owners.

http://www.bit-tech.net/news/hardware/2005/08/18/xfx_lifetime_warranty/1