Quality, pricing, and return strategies in a supply chain: the role of consumer reviews

Abstract

The discrepancy between consumer expectations and actual usage experiences has resulted in elevated return rates for experience products sold online. Online reviews provide valuable insights into consumer satisfaction, which help retailers shape flexible return strategies and guide manufacturers in adapting their product quality. This paper examines a supply chain where an online retailer sells new experience products in two selling periods, focusing on the return strategies offered and the formulation of product prices and quality levels between the retailer and the manufacturer. Furthermore, it explores the interactive effects of online reviews on the decision‐making processes of both parties. We find that as review ratings increase, they become more beneficial to the manufacturer, but not necessarily to the retailer or consumers. This outcome is always contingent on the retailer's return strategy. Specifically, when returns are offered only in the second period, the retailer's profit does not increase with a higher valuation of product reviews. In fact, when overall product ratings are low, enhancing ratings may have an adverse effect, reducing both the retailer's profit and consumer surplus. Notably, for return strategies that provide a money‐back guarantee only in the second period, markets with online reviews offer greater benefits to the retailer when return losses are high, and review ratings are unfavorable. However, regardless of the chosen return strategy, an increase in the product review valuation consistently encourages the retailer to raise the product price in both periods.