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Money-back guarantee in the presence of strategic customer behavior

Author

Listed:
  • Huang, Zongsheng
  • Huang, Lingchen
  • Zhao, Yingxue
  • Meng, Xiaoge

Abstract

Anticipating future clearance markdowns, customers can choose purchase timing to maximize their expected utility. Taking into account such strategic consumer behavior, this paper conducts an analytical research for the optimal design of the money-back guarantee (MBG). Our work found that the degree of strategic consumer behavior can have crucial effects on the optimization of MBG. Specifically, offering an MBG in both the regular and clearance sale periods is optimal for the seller when the customers are highly strategic; otherwise, providing an MBG is optimal only during the regular selling period. In addition, customers can benefit from MBG. In particular, offering an MBG only during the regular selling period generates the highest surplus for consumers when they are comparatively highly strategic; otherwise, offering an MBG during both the regular and clearance sale periods is preferable. Furthermore, an MBG can achieve Pareto improvement for the seller and consumers only in the regular selling period with moderately strategic customers. Compared to extant literature, the fundamental contributions of this paper are (1) the revelation that the degree of strategic customer behavior is a critical factor when designing an MBG, and (2) the development of an analytical characterization of the optimization of an MBG in response to different degrees of strategic customer behavior. Our work well substantializes the result that an MBG policy can be an effective tool for addressing strategic customer behavior.

Suggested Citation

  • Huang, Zongsheng & Huang, Lingchen & Zhao, Yingxue & Meng, Xiaoge, 2021. "Money-back guarantee in the presence of strategic customer behavior," International Journal of Production Economics, Elsevier, vol. 239(C).
    • Handle: RePEc:eee:proeco:v:239:y:2021:i:c:s0925527321001675
    DOI: 10.1016/j.ijpe.2021.108191
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    References listed on IDEAS

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    Cited by:

    1. Shen, Yinhai & Zhang, Qing & Zhang, Zhichao & Ma, Xinyu, 2022. "Omnichannel retailing return operations with consumer disappointment aversion," Operations Research Perspectives, Elsevier, vol. 9(C).
    2. Liu, Zhuojun & Zhang, Michael & Chen, Jing & Diallo, Claver, 2023. "Buy now or later? New or remanufactured? How to attract strategic customers," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 172(C).
    3. Huang, Lingchen & Huang, Zongsheng & Liu, Bin, 2022. "Interacting with strategic waiting for store brand: Online selling format selection," Journal of Retailing and Consumer Services, Elsevier, vol. 67(C).

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