Search Prominence with Costly Product Returns

TL;DR

This paper examines how search prominence affects firm profits in a duopoly when product returns are costly, revealing that prominence can sometimes harm the more visible firm's profitability.

Contribution

It introduces a duopoly search model incorporating costly product returns, highlighting the nuanced effects of prominence on firm profits and platform strategies.

Findings

Higher return costs can invert profit advantages between prominent and non-prominent firms.

Prominence benefits are reduced as return costs increase.

Platforms should consider return costs in ad revenue and policy decisions.

Abstract

Search prominence may have a detrimental impact on a firm's profits in the presence of costly product returns. We analyze the impact of search prominence on firm profitability in a duopoly search model, considering the presence of costly product returns. Consumer match values are assumed to be independently and identically distributed across the two products. Our results show that the non-prominent firm benefits from facing consumers with relatively low match values for the prominent firm's products, thus avoiding costly returns. When return costs are sufficiently high, the prominent firm may earn lower profits than its non-prominent competitor. This outcome holds under both price exogeneity and price competition. Furthermore, the profitability advantage of prominence diminishes as return costs increase. Platforms that maximize ad revenue should consider retaining positive return cost for consumers rather than fully passing it on to firms. For e-commerce platforms, it is crucial to align product return policies with broader management objectives to optimize firm profitability.