The Interaction Between Product Return Policies and Trade-In Adoption

Trade-in programs and return policies have become common operational practices in e-commerce. However, their interaction remains underexplored. This paper considers a durable-goods manufacturer that may offer trade-in programs and allow consumer returns, with returned units resold as open-box products. We develop a four-scenario model to compare the direct and interactive effects of these two operational strategies under common feasibility conditions. Each strategy induces a higher new-product price, yet allowing returns can stimulate total new-product demand at high production costs. Allowing returns also enhances consumer surplus at sufficiently high production costs, while trade-in always reduces it. Both operational strategies can increase the manufacturer's profit at high production costs. Their interaction is asymmetric: offering trade-in reduces the production-cost cutoff above which allowing returns increases profit, while numerical comparisons indicate that allowing returns can move the corresponding trade-in cutoff in either direction. We extend the model to allow a lower new-product dissatisfaction rate for consumers who own used products, and numerical experiments show that the qualitative interaction pattern remains intact over the parameter range examined.