Optimizing pricing in an online marketplace: The role of buy-now, pay-later option and return policies

Abstract

This paper examines the integration of Buy Now, Pay Later (BNPL) services with return policies (refund and exchange) in a supply chain comprising an online marketplace and a retailer. Using a Stackelberg game framework—where the marketplace acts as the leader and the retailer as the follower—we analyze two models: refund/exchange return policies; each of which is formulated with and without BNPL. The models incorporate platform fees and the percentage charged by the marketplace for BNPL as well as prices for the online retailer. Findings reveal that marketplaces should set higher platform fees on the retailer offering refund return policy to offset profit losses from cancellations, as penalties under cancellations are lower than standard fees. Moreover, the exchange return policy aligns better with BNPL, enabling the retailer to set higher prices while minimizing cancellations. Refunds, however, are more viable without BNPL due to inherent cancellation risks. Equilibrium solutions demonstrate that the marketplace's BNPL percentage parameter positively impacts their related prices and the rate of return positively influences Ex-RP driven prices. The analysis underscores that no return policy dominates universally; optimal strategies depend on parameters like cancellation penalty, product supplement during Out-Of-Stock situations fees, and return policies. Moreover, the number of installments acts separately from the BNPL percentage. For the online marketplace, as the owner of the platform, the former leads Ex-RP to become superior while the latter, in most cases, results in the opposite way. This study provides actionable insights for platforms and retailers to balance BNPL offerings with return policy structures.