Abstract: In online sales, customers purchase commodities directly online, which may increase the likelihood of product return since customers would dissatisfy with what they purchase, which results in that return policy becomes a key factor for sellers. A full return policy may be able to raise the customers' confidence and increase the demand, which in turn will increase the cost of the sellers due to increase of possibility of product return. For a partial return policy, it may decrease demand, however which will decrease the cost of the sellers due to decrease the likelihood of product return. How to decide the return policy and the price becomes the critical issue for network operation managers. At the same time, the pricing is always the key problem in operation management. In this paper a return guarantee option combined with the advantages of the full return policy and the partial return policy is proposed. A profit-maximization model is developed to prove the existence of the optimal profit, and to obtain the existed conditions. The existed conditions combined with the actual situation of the market are also analyzed. Two situations are considered in the model, one is the seller provide the return policy and the return guarantee option for the consumers. The other is the seller only provide the return guarantee option for the consumers. The optimal price, the optimal return policy and the optimal return guarantee option price are achieved based on our model analysis in two situations. Providing the return policy and the return guarantee option for the consumers is the best strategy for the sellers compared the two situation profits. Furthermore, the influence of parameters on the variables is analyzed and managerial guidelines for managers are presented. The managers can adjust their decisions according to the change of the market parameters to maximize their profit. The above conclusions are verified by the numerical studies and images. Our research results theoretically elaborate the significance of a return guarantee option in online sale, and provide theoretical guidance for the online seller to maximize their profit.

Key words: return guarantee option, optimal price, optimal return policy, optimal option price