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Price and Money‐Back Guarantees as Signals of Product Quality

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  • Shiou Shieh

Abstract

Why is it so common for the seller to provide guarantees that say “Satisfaction guaranteed or your money back” along with the sale of a product? Newly introduced goods and mail‐ordered products are usually sold with such guarantees. In honoring money‐back guarantees, why is it a common business practice to pay back exactly the purchase price rather than a portion of it? In this paper we study the informational role and optimality of the common business practice of money‐back guarantees in a signaling model with quality uncertainty and risk‐neutral buyers. We find that money‐back guarantees and price together completely reveal a monopoly firm's private information about product quality, Moreover, the private information is revealed at no signaling cost. Furthermore, we show that in terms of the level of monetary compensation specified by a guarantee, price is the profit‐maximizing level of monetary payback in case of product failure.

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  • Shiou Shieh, 1996. "Price and Money‐Back Guarantees as Signals of Product Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 361-377, September.
    • Handle: RePEc:bla:jemstr:v:5:y:1996:i:3:p:361-377
    DOI: 10.1111/j.1430-9134.1996.00361.x
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    References listed on IDEAS

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    Cited by:

    1. Amir Heiman & Bruce P. McWilliams & David Zilberman, 2022. "Adoption of Innovations: Comparing the Imitation and the Threshold Models," Foundations and Trends(R) in Marketing, now publishers, vol. 17(1), pages 1-57, June.
    2. Suwelack, Thomas & Hogreve, Jens & Hoyer, Wayne D., 2011. "Understanding Money-Back Guarantees: Cognitive, Affective, and Behavioral Outcomes," Journal of Retailing, Elsevier, vol. 87(4), pages 462-478.
    3. Liu, Jian & Mantin, Benny & Wang, Haiyan, 2014. "Supply chain coordination with customer returns and refund-dependent demand," International Journal of Production Economics, Elsevier, vol. 148(C), pages 81-89.
    4. Francesca Barigozzi & Paolo G. Garella & Martin Peitz, 2009. "With a Little Help from My Enemy: Comparative Advertising as a Signal of Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 1071-1094, December.
    5. Chen, Bintong & Chen, Jing, 2017. "Compete in Price or Service?—A Study of Personalized Pricing and Money Back Guarantees," Journal of Retailing, Elsevier, vol. 93(2), pages 154-171.
    6. Nizovtsev, Dmitri & Novshek, William, 2004. "Money-back guarantees and market experimentation," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 983-996, September.
    7. Stephan, Levy, 2004. "Best-price Guarantees as a Quality Signal," MPRA Paper 13466, University Library of Munich, Germany, revised 02 Nov 2004.
    8. Sun, Miao & Chen, Jing & Tian, Ye & Yan, Yufei, 2021. "The impact of online reviews in the presence of customer returns," International Journal of Production Economics, Elsevier, vol. 232(C).
    9. Murthy, D. N. P. & Djamaludin, I., 2002. "New product warranty: A literature review," International Journal of Production Economics, Elsevier, vol. 79(3), pages 231-260, October.
    10. Bilanakos, Christos & Heywood, John S. & Sessions, John & Theodoropoulos, Nikolaos, 2018. "Does demand for product quality increase worker training?," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 159-177.
    11. Li, Dan & Chen, Jing & Liao, Yi, 2021. "Outsourcing strategy in the presence of the customer returns," International Journal of Production Economics, Elsevier, vol. 240(C).
    12. Fan, Zhi-Ping & Chen, Zhongwei, 2020. "When should the e-tailer offer complimentary return-freight insurance ?," International Journal of Production Economics, Elsevier, vol. 230(C).
    13. Huifang Jiao & Xuan Wang & Chi To Ng & Lijun Ma, 2021. "Pricing and Return Policies in a Competitive Market: A Consumer-Valuation Based Analysis with Valuation Uncertainties," Sustainability, MDPI, vol. 13(3), pages 1-23, January.
    14. Chen, Jing & Chen, Bintong & Li, Wei, 2018. "Who should be pricing leader in the presence of customer returns?," European Journal of Operational Research, Elsevier, vol. 265(2), pages 735-747.
    15. Jinhong Xie & Eitan Gerstner, 2007. "Service Escape: Profiting from Customer Cancellations," Marketing Science, INFORMS, vol. 26(1), pages 18-30, 01-02.
    16. Steven A. Matthews & Nicola Persico, 2007. "Information Acquisition and Refunds for Returns," Carlo Alberto Notebooks 54, Collegio Carlo Alberto.
    17. Li, Dan & Chen, Jing & Liao, Yi, 2021. "Optimal decisions on prices, order quantities, and returns policies in a supply chain with two-period selling," European Journal of Operational Research, Elsevier, vol. 290(3), pages 1063-1082.
    18. Liang Guo, 2009. "Service Cancellation and Competitive Refund Policy," Marketing Science, INFORMS, vol. 28(5), pages 901-917, 09-10.
    19. Yanlin Chen & Jun Zhang, 2019. "Signaling by Bayesian Persuasion and Pricing Strategy. Short title: Disclosure and Price Signaling," Working Paper Series 2019/14, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    20. Anthony J. Dukes & Rajeev K. Tyagi, 2009. "Pricing in vitro fertilization procedures," Health Economics, John Wiley & Sons, Ltd., vol. 18(12), pages 1461-1480, December.
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