Information Acquisition and Refunds for Returns

This file is part of IDEAS, which uses RePEc data

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)

Additional information is available for the following registered author(s):

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.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

Publisher Info
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.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length: 34 pages
Date of creation: 16 Jul 2007
Date of revision:
Handle: RePEc:pen:papers:07-021

Contact details of provider:
Postal: 3718 Locust Walk, Philadelphia, PA 19104
Phone: 215-898-9992
Fax: 215-573-2378
Email:
Web page: http://www.econ.upenn.edu/Centers/pier
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Dolly Guarini).

Other versions of this item:

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.:

Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law & Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
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. [Downloadable!] (restricted)
Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Strategic Information Gathering before a Contract Is Offered," Journal of Economic Theory, Elsevier, vol. 81(1), pages 163-200, July. [Downloadable!] (restricted)
Other versions:
- Khalil, F & Rochet, J-C, 1997. "Strategic Information Gathering Before a Contract is Offered," Discussion Papers in Economics at the University of Washington 97-15, Department of Economics at the University of Washington.
- Khalil, F & Rochet, J-C, 1997. "Strategic Information Gathering Before a Contract is Offered," Working Papers 97-15, University of Washington, Department of Economics.
- CRÉMER, Jacques & KHALIL, Fahad & ROCHET, Jean-Charles, 1996. "Strategic Information Gathering Before a Contract Is Offered," IDEI Working Papers 61, Institut d'Économie Industrielle (IDEI), Toulouse.
- Cremer, J. & Khalil, F & Rochet, J.-C., 1996. "Strategic Information Gathering Before a Contract is Offered," Papers 976.425, Toulouse - GREMAQ.
- 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.
Shiou Shieh, 1996. "Price and Money-Back Guarantees as Signals of Product Quality," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 5(3), pages 361-377, 09. [Downloadable!] (restricted)
Che, Yeon-Koo, 1996. "Customer Return Policies for Experience Goods," Journal of Industrial Economics, Blackwell Publishing, vol. 44(1), pages 17-24, March. [Downloadable!] (restricted)
Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Other versions:
- Khalil, F & Rochet, J-C, 1997. "Contracts and Productive Information Gathering," Working Papers 97-16, University of Washington, Department of Economics.
- Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and Productive Information Gathering," Discussion Paper Series In Economics And Econometrics 9707, Economics Division, School of Social Sciences, University of Southampton.
- Khalil, F & Rochet, J-C, 1997. "Contracts and Productive Information Gathering," Discussion Papers in Economics at the University of Washington 97-16, Department of Economics at the University of Washington.
- Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and Productive Information Gathering," Papers 97.468, Toulouse - GREMAQ.
Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-80, January. [Downloadable!] (restricted)
Other versions:
- Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
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.
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. [Downloadable!] (restricted)
Steven A. Matthews & Nicola Persico, 2005. "Information Acquisition and the Excess Refund Puzzle," PIER Working Paper Archive 05-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
Bergemann, Dirk & Pesendorfer, Martin, 2001. "Information Structures in Optimal Auctions," CEPR Discussion Papers 2991, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Dirk Bergemann & Martin Pesendorfer, 2001. "Information Structures in Optimal Auctions," Cowles Foundation Discussion Papers 1323, Cowles Foundation, Yale University. [Downloadable!]
- Bergemann, Dirk & Pesendorfer, Martin, 2007. "Information structures in optimal auctions," Journal of Economic Theory, Elsevier, vol. 137(1), pages 580-609, November. [Downloadable!] (restricted)
Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-67, March. [Downloadable!] (restricted)
Other versions:
- Steven Matthews & John Moore, 1985. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Discussion Papers 661, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
Courty, Pascal & Li, Hao, 2000. "Sequential Screening," Review of Economic Studies, Blackwell Publishing, vol. 67(4), pages 697-717, October.
Other versions:
- Pascal Courty & Li Hao, 1997. "Sequential Screening," Economics Working Papers 224, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
Barzel, Yoram, 1982. "Measurement Cost and the Organization of Markets," Journal of Law & Economics, University of Chicago Press, vol. 25(1), pages 27-48, April.
Russell Cooper & Thomas W. Ross, 1985. "Product Warranties and Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 103-113, Spring. [Downloadable!] (restricted)
Other versions:
- Russell Cooper & T.W. Ross, 1984. "Product Warranties and Double Moral Hazard," Cowles Foundation Discussion Papers 716, Cowles Foundation, Yale University. [Downloadable!]
Dirk Bergemann & Juuso Valimaki, 2002. "Information Acquisition and Efficient Mechanism Design," Econometrica, Econometric Society, vol. 70(3), pages 1007-1033, May. [Downloadable!] (restricted)
Other versions:
- Dirk Bergemann & Juuso Vaimaki, 2000. "Information Acquisition and Efficient Mechanism Design," Cowles Foundation Discussion Papers 1248, Cowles Foundation, Yale University. [Downloadable!]
Kandel, Eugene, 1996. "The Right to Return," Journal of Law & Economics, University of Chicago Press, vol. 39(1), pages 329-56, April.
Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Other versions:
- Heiman, Amir & Zilberman, David & Purohit, Devavrat, 1996. "Demonstrations and money-back guarantees : market mechanisms to reduce uncertainty," CUDARE Working Paper Series 808, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-78, June. [Downloadable!] (restricted)
Other versions:
- CRÉMER, Jacques & KHALIL, Fahad, 1991. "Gathering Information before Signing a Contract," IDEI Working Papers 5, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
- Cremer, J. & Khalil, F., 1991. "Gathering Information Before Signing a Contract," Working Papers 91-16, University of Washington, Department of Economics.
- Cremer, J. & Khalil, F., 1991. "Gathering Information Before Signing a Contract," Discussion Papers in Economics at the University of Washington 91-16, Department of Economics at the University of Washington.

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.)

Russell Gerrard & Bjarne Højgaard & Elena Vigna, 2008. "Choosing the Optimal Annuitization Time Post Retirement," Carlo Alberto Notebooks 76, Collegio Carlo Alberto. [Downloadable!]

Statistics

Access and download statistics

Did you know? You may want to explore EconPapers, which displays the same data as IDEAS in a different way.

This page was last updated on 2008-10-28.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.