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Information Acquisition and the Excess Refund Puzzle

  • Steven A. Matthews

    ()

    (Department of Economics, University of Pennsylvania)

  • Nicola Persico

    ()

    (Department of Economics, University of Pennsylvania)

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.

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File URL: http://economics.sas.upenn.edu/system/files/working-papers/05-015.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 05-015.

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Length: 39 pages
Date of creation: 28 Mar 2005
Date of revision:
Handle: RePEc:pen:papers:05-015
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  1. Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and productive information gathering," Discussion Paper Series In Economics And Econometrics 9707, Economics Division, School of Social Sciences, University of Southampton.
  2. Cremer, J. & Khalil, F., 1991. "Gathering Information Before Signing a Contract," Working Papers 91-16, University of Washington, Department of Economics.
  3. repec:att:wimass:9509 is not listed on IDEAS
  4. Dirk Bergemann & Martin Pesendorfer, 2001. "Information Structures in Optimal Auctions," Cowles Foundation Discussion Papers 1323, Cowles Foundation for Research in Economics, Yale University.
  5. Pascal Courty & Li Hao, 1997. "Sequential screening," Economics Working Papers 224, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Dirk Bergemann & Juuso Vaimaki, 2000. "Information Acquisition and Efficient Mechanism Design," Cowles Foundation Discussion Papers 1248, Cowles Foundation for Research in Economics, Yale University.
  7. Heiman, Amir & McWilliams, Bruce & Zilberman, David, 2001. "Demonstrations and money-back guarantees: market mechanisms to reduce uncertainty," Journal of Business Research, Elsevier, vol. 54(1), pages 71-84, October.
  8. Péter Eső & Bal�zs Szentes, 2007. "Optimal Information Disclosure in Auctions and the Handicap Auction," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 705-731.
  9. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  10. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Strategic Information Gathering before a Contract Is Offered," Journal of Economic Theory, Elsevier, vol. 81(1), pages 163-200, July.
  11. Che, Yeon-Koo, 1996. "Customer Return Policies for Experience Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 17-24, March.
  12. 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.
  13. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-27, May.
  14. Barzel, Yoram, 1982. "Measurement Cost and the Organization of Markets," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 27-48, April.
  15. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
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