The Interaction Between Product Return Policies and Trade-In Adoption

Trade-in programs and consumer return policies are common in e-commerce. However, their interaction remains underexplored. We consider a durable-goods manufacturer that sells directly to consumers and resells returned products as open-box products. Within their common feasible regions, we compare four scenarios based on whether trade-in is offered and whether returns are allowed. Allowing returns can increase total new-product demand at high production costs, whereas offering trade-in always reduces it. Holding trade-in adoption fixed, allowing returns increases manufacturer profit, consumer surplus, and social welfare above a common production-cost threshold. Offering trade-in reduces consumer surplus and social welfare, although it can increase manufacturer profit. The two policies interact asymmetrically. Offering trade-in lowers the cost threshold above which allowing returns becomes profitable. By contrast, numerical results show that allowing returns can either raise or lower the corresponding threshold for trade-in. Each policy combination can be optimal, and offering both is optimal at sufficiently high production costs. Numerical extensions show that the two policies’ effects on manufacturer profit and consumer surplus largely persist when replacement consumers are less likely to be dissatisfied. They also persist when traded-in products have low recovery values.