Behavior-based optimal refund policy under advance selling: an analysis of the impact of loss fairness concerns

Buying and returning products can result in losses for both transaction parties, and a partial refund policy affects the loss difference. If consumers feel the policy is unfair, they can easily trigger their inequity aversion to loss. This study analyzes the effects of consumers’ loss fairness concerns on a two-period partial refund policy in advance selling. We develop a mathematical framework in which a firm sells products to consumers in advance, and consumers decide when to buy. The firm allows pre-purchased consumers to return the products in the spot period, resulting in potential losses for both parties. Considering fair-minded consumers, we first show how the firm responds to loss fairness concerns to make an optimal partial refund policy. We then discuss whether the firm is affected by loss fairness concerns. We find that when the degree of fairness concern exceeds a certain threshold, consumers’ loss fairness concerns negatively affect the firm. Besides, we propose a fairness-mitigating mechanism to relieve the negative effect on the firm, which might benefit both parties. Our analysis and results first provide management insights into the importance of incorporating loss fairness concerns in advance selling and the influence on partial refund policy.