Information Acquisition and Refunds for Returns

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Information Acquisition and Refunds for Returns

Author Info

Steven A. Matthews () (Department of Economics, University of Pennsylvania)
Nicola Persico () (Department of Economics and School of Law, New York University)

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Steven A. Matthews

Abstract

A product exhibits personal fit uncertainty when its consumers have idiosyncratic and uncertain values for it. Often a consumer can learn her long-run value quickly by obtaining the good for a trial period. Money back guarantees of satisfaction are commonly used to lower the cost to consumers of learning their values this way. Increasingly, however, consumers can instead learn about their values before they purchase by, e.g., reading product reviews or consulting experts. We study the effect on a firm’s optimal price and refund of this competing source of information. An efficient outcome would be achieved by setting the refund for a return equal to its salvage value. But a monopoly will, for some parameters, induce consumers to stay uninformed by promising a refund that is greater than the salvage value. This generates an inefficiently large number of returns, which the firm finds worthwhile in order to eliminate the information rents that consumers would obtain by becoming informed. This finding is consistent with the observation that for many products, money back guarantees are generous, as they commonly refund the entire, or almost the entire, purchase price of a product.

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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 07-021.

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Length: 34 pages
Date of creation: 16 Jul 2007
Date of revision:
Handle: RePEc:pen:papers:07-021

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Paper
- Steven A. Matthews & Nicola Persico, 2007. "Information Acquisition and Refunds for Returns," Carlo Alberto Notebooks 54, Collegio Carlo Alberto. [Downloadable!]

Find related papers by JEL classification:
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-08-08 (All new papers)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Inderst, Roman & Peitz, Martin, 2008. "Selling Service Plans to Differentially Informed Customers," ZEW Discussion Papers 08-125, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
Esteban Jaimovich, 2008. "Adverse Selection and Entrepreneurship in a Model of Development," Carlo Alberto Notebooks 78, Collegio Carlo Alberto. [Downloadable!]
Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci & Luigi Montrucchio, 2008. "Complete Monotone Quasiconcave Duality," Carlo Alberto Notebooks 80, Collegio Carlo Alberto. [Downloadable!]
Ales Cerný & Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2008. "On the Computation of Optimal Monotone Mean-Variance Portfolios via Truncated Quadratic Utility," Carlo Alberto Notebooks 79, Collegio Carlo Alberto. [Downloadable!]
Russell Gerrard & Bjarne Højgaard & Elena Vigna, 2008. "Choosing the Optimal Annuitization Time Post Retirement," Carlo Alberto Notebooks 76, Collegio Carlo Alberto. [Downloadable!]

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