Why so many happy returns?

It’s much easier to return a purchase in the United States than in Europe. An old joke has it that Germans are very nice people until you try to buy something from them. Imagine then how difficult it is to return something in Germany. The no questions asked, easy return is not common in most of Europe.

It’s puzzling why this should be so. One explanation offered at lunch yesterday when I raised this question focused on the demand side. Incomes are lower in Europe, perhaps people of lower income don’t demand easy return policies. The theory here is a little odd – an easy return policy is a form of insurance and the poor should demand more insurance not less – but we do observe the poor buying less insurance in other areas so it’s not ruled out completely. The differences in return policy, however, are striking while the differences in income are modest. It’s not like we observe large differences in return policy across the U.S. states, for example, and Germany is among the richer countries in Europe. Return policy has also been relatively good in the United States for a very long time – going back at least to the 1895 Sears Roebuck catalog.

From the supply side the question becomes why is it cheaper for U.S. firms to offer easy returns than it is for European firms? I think part of the answer is suggested by that Sears-Roebuck guarantee. Retailers in the United States tend to be larger than in Europe and because of this they can take advantages of economies of scale both in insurance and in establishing a reputation for quality. European retailers are smaller and have greater monopoly power (even though there are more of them they have local monopoly power that the big boxes in the United States do not.)

If the supply theory is correct then multi-national firms that offer easy return policies in the United States ought to offer similar policies in Europe – the demand theory, in contrast, says that return policy should differ by country according to income. I bet, however, that Ikea offers easy returns in Sweden just as in the United States.

Email me if you have other ideas, experiences or evidence on this question. The return puzzle may seem minor but it has widespread implications. Return policy is not chosen alone but in conjunction with product quality. Easy return policy increases the incentive to produce high-quality products that consumers will not want to return and high-quality products reduces the cost of offering an easy return policy.