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Information Acquisition and the Excess Refund Puzzle

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Author Info

  • Steven A. Matthews

    ()
    (Department of Economics, University of Pennsylvania)

  • Nicola Persico

    ()
    (Department of Economics, University of Pennsylvania)

Abstract

A buyer can learn her value for a returnable experience good by trying it out, with the option of returning the good for whatever refund the seller offers. Sellers tend to offer a “no questions asked” refund for such returns, a money back guarantee. The refund is often too generous, generating inefficiently high levels of returns. We present two versions of a model of a returnable goods market. In the Information Acquisition Model, consumers are ex ante identical and uninformed of their private values for the good. The firm then offers a generous refund in order to induce the consumers to learn their values by purchasing and trying the good out, rather than by doing costly research prior to purchasing. In the Screening Model, some consumers have negligible costs of becoming informed about their values prior to purchasing, and always do so; other consumers have prohibitive costs of acquiring pre-purchase information and always stay uninformed. The firm’s optimal screening menu may then contain only a single contract, one that specifies a generous refund, and hence a high purchase price, in order to weaken the incentive constraint of the informed consumers.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 05-015.

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Length: 39 pages
Date of creation: 28 Mar 2005
Date of revision:
Handle: RePEc:pen:papers:05-015

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Keywords: information acquisition; refunds; money back guarantees; returnable experience goods;

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References

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  1. Che, Yeon-Koo, 1996. "Customer Return Policies for Experience Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 17-24, March.
  2. Crémer, Jacques & Khalil, Fahad, 1991. "Gathering Information before Signing a Contract," IDEI Working Papers 5, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Cremer, J. & Khalil, F. & Rochet, J.-C., 1997. "Strategic information gathering before a contract is offered," Discussion Paper Series In Economics And Econometrics 9708, Economics Division, School of Social Sciences, University of Southampton.
  4. Barzel, Yoram, 1982. "Measurement Cost and the Organization of Markets," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 27-48, April.
  5. Marvel, Howard P & Peck, James, 1995. "Demand Uncertainty and Returns Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 691-714, August.
  6. Pascal Courty & Li Hao, 1997. "Sequential screening," Economics Working Papers 224, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Dirk Bergemann & Martin Pesendorfer, 2001. "Information Structures in Optimal Auctions," Cowles Foundation Discussion Papers 1323, Cowles Foundation for Research in Economics, Yale University.
  8. Péter Eső & Bal�zs Szentes, 2007. "Optimal Information Disclosure in Auctions and the Handicap Auction," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 705-731.
  9. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Contracts and Productive Information Gathering," Games and Economic Behavior, Elsevier, vol. 25(2), pages 174-193, November.
  10. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  11. Heiman, Amir & McWilliams, Bruce & Zilberman, David, 2001. "Demonstrations and money-back guarantees: market mechanisms to reduce uncertainty," Journal of Business Research, Elsevier, vol. 54(1), pages 71-84, October.
  12. Dirk Bergemann & Juuso Vaimaki, 2000. "Information Acquisition and Efficient Mechanism Design," Cowles Foundation Discussion Papers 1248, Cowles Foundation for Research in Economics, Yale University.
  13. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-27, May.
  14. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
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Cited by:
  1. Heski Bar-Isaac & Guillermo Caruana & Vicente Cuñat, 2010. "Information Gathering and Marketing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 375-401, 06.
  2. Steven A. Matthews & Nicola Persico, 2007. "Information Acquisition and Refunds for Returns," PIER Working Paper Archive 07-021, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Zhang, Jun, 2013. "Revenue maximizing with return policy when buyers have uncertain valuations," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 452-461.
  4. Ringbom, Staffan & Shy, Oz, 2008. "Refunds and collusion in service industries," Journal of Economics and Business, Elsevier, vol. 60(6), pages 502-516.

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