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Information Acquisition and the Excess Refund Puzzle

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  • Steven A. Matthews

    () (Department of Economics, University of Pennsylvania)

  • Nicola Persico

    () (Department of Economics, University of Pennsylvania)

Abstract

A buyer can learn her value for a returnable experience good by trying it out, with the option of returning the good for whatever refund the seller offers. Sellers tend to offer a “no questions asked” refund for such returns, a money back guarantee. The refund is often too generous, generating inefficiently high levels of returns. We present two versions of a model of a returnable goods market. In the Information Acquisition Model, consumers are ex ante identical and uninformed of their private values for the good. The firm then offers a generous refund in order to induce the consumers to learn their values by purchasing and trying the good out, rather than by doing costly research prior to purchasing. In the Screening Model, some consumers have negligible costs of becoming informed about their values prior to purchasing, and always do so; other consumers have prohibitive costs of acquiring pre-purchase information and always stay uninformed. The firm’s optimal screening menu may then contain only a single contract, one that specifies a generous refund, and hence a high purchase price, in order to weaken the incentive constraint of the informed consumers.

Suggested Citation

  • 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.
  • Handle: RePEc:pen:papers:05-015
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    File URL: http://economics.sas.upenn.edu/system/files/working-papers/05-015.pdf
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    References listed on IDEAS

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    7. 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.
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    Cited by:

    1. Heski Bar-Isaac & Guillermo Caruana & Vicente Cuñat, 2010. "Information Gathering and Marketing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 375-401, June.
    2. Ringbom, Staffan & Shy, Oz, 2008. "Refunds and collusion in service industries," Journal of Economics and Business, Elsevier, vol. 60(6), pages 502-516.
    3. Heiman, Amir & Just, David R. & McWilliams, Bruce P. & Zilberman, David, 2015. "A prospect theory approach to assessing changes in parameters of insurance contracts with an application to money-back guarantees," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 54(C), pages 105-117.
    4. Zhang, Jun, 2013. "Revenue maximizing with return policy when buyers have uncertain valuations," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 452-461.
    5. Jeffrey D. Shulman & Anne T. Coughlan & R. Canan Savaskan, 2010. "Optimal Reverse Channel Structure for Consumer Product Returns," Marketing Science, INFORMS, vol. 29(6), pages 1071-1085, 11-12.
    6. repec:eee:ijrema:v:27:y:2010:i:2:p:175-187 is not listed on IDEAS
    7. Steven A. Matthews & Nicola Persico, 2007. "Information Acquisition and Refunds for Returns," Carlo Alberto Notebooks 54, Collegio Carlo Alberto.
    8. Tridib Sharma & Levent Ülkü, 2015. "Money-Back Guarantees," Working Papers 1502, Centro de Investigacion Economica, ITAM.
    9. Jeffrey D. Shulman & Anne T. Coughlan & R. Canan Savaskan, 2011. "Managing Consumer Returns in a Competitive Environment," Management Science, INFORMS, vol. 57(2), pages 347-362, February.

    More about this item

    Keywords

    information acquisition; refunds; money back guarantees; returnable experience goods;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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