Who Benefits from Returnless Refunds? Platform Design under Opportunistic Consumers

The returnless refund policy has been widely adopted by e-commerce platforms. These platforms hope this policy will encourage consumers to make purchases and raise merchants’ quality standards, but it can be exploited by opportunistic consumers who file fraudulent claims, causing financial losses for merchants. This paper constructs a theoretical model to analyze the consequences of introducing a returnless-refund policy and to study how the platform’s policy leniency affects outcomes. We model the platform’s policy leniency as the eligibility criterion for approving refund requests, which addresses fraudulent claims: the more lenient the policy, the lower the effort required for consumers to commit no-return fraud successfully. The analysis demonstrates that, in the presence of opportunistic consumers, returnless refunds can effectively discourage low-quality merchants from participating on the platform, but fail to reliably boost the successful product sales. The positive effect on sales is only observed for products with relatively low salvage values. Contrary to conventional wisdom that merchants would raise prices to compensate for refund-related losses, we show that when policy leniency is moderate and the reduction in hassle costs is limited, merchants may find it optimal to lower retail prices. Following the adoption of returnless refunds, the platform is more likely than merchants to experience an improvement in profitability. In addition, when the platform endogenously determines the level of policy leniency, both the platform and consumers achieve their maximum surpluses, whereas merchants prefer a stricter policy. Surprisingly, our results further reveal that a higher fraction of opportunistic consumers may lead the platform to choose a more lenient returnless refund policy.