alt Hacker NewsI don't see anywhere where the manufacturer or retailer/distributor is required to perform one of the actions based on what the customer wishes of returning or replacing the item.
I also fail to see where anyone would expect the current purchase price to be refunded to them instead of the original paid purchase price.
If the regulations require making the customer whole, then I could see an argument for current fair market value, or even just giving nominal interest on the purchase price.
If in your thought experiment, the retailers had a potential risk (requiring fair market value returns/replacement), and they failed to insure themselves from that risk, then they indeed deserve to be forced out of business.
So possibly the warranty may say "replace or refund at supplier's option." In that case, it's clear. But if we don't know what the "fine print" says, then I don't see how we can figure out who was wrong or right.