City Research Online

Abstract

The surge in product returns poses significant financial and environmental challenges, particularly for seasonal goods, as retailers must often discard or liquidate returned items at the end of a short selling season. To address these challenges, we propose a tiered-refund policy integrated with return restoration. Under this policy, the retailer offers full refunds for early returns and only partial refunds for late returns, creating a supply of early returns that can be restored and resold as new. By employing a two-period model to capture the essential dynamic of early and late returns, and accounting for consumer valuation uncertainty and the disutility of returning early, we characterize the retailer’s optimal late-return refund, initial inventory level, and restoration quantities. We investigate the impact of the proposed tiered-refund policy with return restoration relative to two benchmarks: a restrictive short-return-window policy and a lenient full-refund policy. Our analytical results show that, even without restoration, the tiered-refund policy dominates the short-return-window policy, and outperforms the full-refund policy unless consumer valuations are low. When restoration is feasible, the tiered-refund policy becomes even more attractive compared to the full-refund policy for lower consumer valuations and strictly dominates if restoration costs are not prohibitively high. We also find that the operational flexibility created by restoration leads the retailer to lower the optimal late-return refund in order to incentivize early returns. Numerical experiments using practice-calibrated parameters show that the tiered-refund policy with restoration increases profits by an average of 11% relative to the short-return-window policy and 7% relative to the full-refund policy, with maximum gains reaching 38%. Furthermore, the policy reduces total environmental impact by an average of 1.5% and 5% against the respective benchmarks, with reductions of up to 13%. These sustainability gains are driven by converting otherwise discarded returns into usable products and by reducing initial inventory requirements through restoration. Finally, we find that tiered refunds and restoration are complementary in improving profitability.

Publication Type:	Article
Additional Information:	© The Author(s) 2026. This is the accepted manuscript of an article published by SAGE. Please refer to the publisher’s terms and conditions for information on re-use.
Publisher Keywords:	inventory, consumer returns, return restoration, tiered refund
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Faculty of Management
SWORD Depositor:	Symplectic Administrator

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