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Sales Talk, Cancellation Terms and the Role of Consumer Protection

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  • Roman Inderst
  • Marco Ottaviani

Abstract

This article analyses contract cancellation and product return policies in markets in which sellers advise customers about the suitability of their offering. When customers are fully rational, it is optimal for sellers to offer the right to cancel or return on favourable terms. A generous return policy makes the seller's "cheap talk" at the point of sale credible. This observation provides a possible explanation for the excess refund puzzle and also has implications for the management of customer reviews. When customers are credulous, instead, sellers have an incentive to set unfavourable terms to exploit the inflated beliefs they induce in their customers. The imposition of a minimum statutory standard improves welfare and consumer surplus when customers are credulous. In contrast, competition policy reduces contractual inefficiencies with rational customers, but it is not effective with credulous customers. Copyright 2013, Oxford University Press.

Suggested Citation

  • Roman Inderst & Marco Ottaviani, 2013. "Sales Talk, Cancellation Terms and the Role of Consumer Protection," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(3), pages 1002-1026.
  • Handle: RePEc:oup:restud:v:80:y:2013:i:3:p:1002-1026
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    File URL: http://hdl.handle.net/10.1093/restud/rdt005
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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