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Money-Back Guarantees

Author

Listed:
  • Tridib Sharma

    (Centro de Investigación Económica (CIE), Instituto Tecnológico Autónomo de México (ITAM))

  • Levent Ülkü

    (Centro de Investigación Económica (CIE), Instituto Tecnológico Autónomo de México (ITAM))

Abstract

We provide a framework to evaluate whether or not a seller can increase his revenue in interacting with a privately informed buyer by using money-back guarantees (MBGs). The buyer's value for the good exhibits fi risk and his type is multidimensional giving the probability of Öt as well as the value in case of fit. The seller has the option to offer a MBG together with the good. We reformulate the optimal mechanism design problem and show that typically the optimal mechanism contains MBGs. Furthermore choosing the optimal mechanism is tantamaount to choosing two prices: (i) a discount price at which no MBG is offered and (ii) a regular (higher) price which comes with a MBG. We also analyze two limit scenarios where private information is one-dimensional. If the seller knows the probability of fit but not its value, then MBGs are not useful. If, on the other hand, the value of fit is commonly known but its probability is buyer's private information, then MBGs can be used to extract full surplus from the buyer.

Suggested Citation

  • Tridib Sharma & Levent Ülkü, 2015. "Money-Back Guarantees," Working Papers 1502, Centro de Investigacion Economica, ITAM.
    • Handle: RePEc:cie:wpaper:1502
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    References listed on IDEAS

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