IDEAS home Printed from https://ideas.repec.org/p/cie/wpaper/1502.html

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
    as

    Download full text from publisher

    File URL: http://ftp.itam.mx/pub/academico/inves/ulku/15-02.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
    2. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
    3. Bruce McWilliams, 2012. "Money-Back Guarantees: Helping the Low-Quality Retailer," Management Science, INFORMS, vol. 58(8), pages 1521-1524, August.
    4. Che, Yeon-Koo, 1996. "Customer Return Policies for Experience Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 17-24, March.
    5. Geoffrey Heal, 1977. "Guarantees and Risk-Sharing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 549-560.
    6. Manelli, Alejandro M. & Vincent, Daniel R., 2012. "Multidimensional mechanism design: Revenue maximization and the multiple-good monopoly. A corrigendum," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2492-2493.
    7. V. Daniel R. Guide , Jr. & Gilvan C. Souza & Luk N. Van Wassenhove & Joseph D. Blackburn, 2006. "Time Value of Commercial Product Returns," Management Science, INFORMS, vol. 52(8), pages 1200-1214, August.
    8. Sridhar Moorthy & Kannan Srinivasan, 1995. "Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs," Marketing Science, INFORMS, vol. 14(4), pages 442-466.
    9. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    10. V. Padmanabhan & I. P. L. Png, 1997. "Manufacturer's Return Policies and Retail Competition," Marketing Science, INFORMS, vol. 16(1), pages 81-94.
    11. 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.
    12. 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 441-467, March.
    13. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-1257, November.
    14. Eric T. Anderson & Karsten Hansen & Duncan Simester, 2009. "The Option Value of Returns: Theory and Empirical Evidence," Marketing Science, INFORMS, vol. 28(3), pages 405-423, 05-06.
    15. Pascal Courty & Li Hao, 2000. "Sequential Screening," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(4), pages 697-717.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Steven A. Matthews & Nicola Persico, 2007. "Information Acquisition and Refunds for Returns," Carlo Alberto Notebooks 54, Collegio Carlo Alberto.
    2. Xuanming Su, 2009. "Consumer Returns Policies and Supply Chain Performance," Manufacturing & Service Operations Management, INFORMS, vol. 11(4), pages 595-612, March.
    3. Jinyang Zheng & Youwei Wang & Yong Tan, 2023. "Platform Refund Insurance or Being Cast Out: Quantifying the Signaling Effect of Refund Options in the Online Service Marketplace," Information Systems Research, INFORMS, vol. 34(3), pages 910-934, September.
    4. Mierendorff, Konrad, 2016. "Optimal dynamic mechanism design with deadlines," Journal of Economic Theory, Elsevier, vol. 161(C), pages 190-222.
    5. Alexey Kushnir & James Michelson, 2022. "Optimal Multi-Dimensional Auctions: Conjectures and Simulations," Papers 2207.01664, arXiv.org.
    6. Chen, Bo & Ni, Debing, 2017. "Optimal bundle pricing under correlated valuations," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 248-281.
    7. X. Ruiz del Portal, 2012. "Conditions for incentive compatibility in models with multidimensional allocation functions and one-dimensional types," Review of Economic Design, Springer;Society for Economic Design, vol. 16(4), pages 311-321, December.
    8. Duong, Quang Huy & Zhou, Li & Meng, Meng & Nguyen, Truong Van & Ieromonachou, Petros & Nguyen, Duy Tiep, 2022. "Understanding product returns: A systematic literature review using machine learning and bibliometric analysis," International Journal of Production Economics, Elsevier, vol. 243(C).
    9. Mark Armstrong, 2016. "Nonlinear Pricing," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 583-614, October.
    10. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, vol. 85(2), pages 258-293, April.
    11. Rokonuzzaman, Md & Iyer, Pramod & Harun, Ahasan, 2021. "Return policy, No joke: An investigation into the impact of a retailer's return policy on consumers' decision making," Journal of Retailing and Consumer Services, Elsevier, vol. 59(C).
    12. Pavlov Gregory, 2011. "Optimal Mechanism for Selling Two Goods," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-35, February.
    13. Hanming Fang & Peter Norman, 2010. "Optimal Provision of Multiple Excludable Public Goods," American Economic Journal: Microeconomics, American Economic Association, vol. 2(4), pages 1-37, November.
    14. Briest, Patrick & Chawla, Shuchi & Kleinberg, Robert & Weinberg, S. Matthew, 2015. "Pricing lotteries," Journal of Economic Theory, Elsevier, vol. 156(C), pages 144-174.
    15. Pascal Courty & Li Hao, 2000. "Sequential Screening," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(4), pages 697-717.
    16. Bikhchandani, Sushil & Mishra, Debasis, 2022. "Selling two identical objects," Journal of Economic Theory, Elsevier, vol. 200(C).
    17. Ying-Ju Chen, 2011. "Optimal Selling Scheme for Heterogeneous Consumers with Uncertain Valuations," Mathematics of Operations Research, INFORMS, vol. 36(4), pages 695-720, November.
    18. Pavlov Gregory, 2011. "A Property of Solutions to Linear Monopoly Problems," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-18, February.
    19. Rochet, Jean-Charles, 2024. "Multidimensional screening after 37 years," Journal of Mathematical Economics, Elsevier, vol. 113(C).
    20. Alexandre Belloni & Giuseppe Lopomo & Shouqiang Wang, 2010. "Multidimensional Mechanism Design: Finite-Dimensional Approximations and Efficient Computation," Operations Research, INFORMS, vol. 58(4-part-2), pages 1079-1089, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cie:wpaper:1502. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Diego Dominguez (email available below). General contact details of provider: https://edirc.repec.org/data/ciitamx.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.