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Refunds as a Metering Device

Author Info

Listed author(s):
  • Inderst, Roman
  • Tirosh, Gilad

Abstract

Firms frequently offer refunds, both when physical products are returned and when service contracts are terminated prematurely. We show how refunds act as a "metering device" when consumers learn about their personal valuation while experimenting with the product or service. Our theory predicts that low-quality firms offer inefficiently strict terms for refunds, while high-quality firms offer inefficiently generous terms. This may help to explain the observed variety in contractual terms. As in our model strict cancellation terms and low refunds are used to price discriminate, rather than to trap consumers into purchasing inferior products, the imposition of a statutory minimum refund policy would not, in general, improve consumer surplus or welfare.

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File URL: https://mpra.ub.uni-muenchen.de/53846/1/MPRA_paper_53846.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 53846.

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Date of creation: Jun 2011
Handle: RePEc:pra:mprapa:53846
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Keywords: Refunds; Cancellation terms; Metering;

Find related papers by JEL classification:

  • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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  1. Che, Yeon-Koo, 1996. "Customer Return Policies for Experience Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 17-24, March.
  2. George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2003. "Projection Bias in Predicting Future Utility," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1209-1248.
  3. Péter Eső & Balázs Szentes, 2007. "Optimal Information Disclosure in Auctions and the Handicap Auction," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 705-731.
  4. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
  5. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
  6. Mann, Duncan P & Wissink, Jennifer P, 1990. "Money-Back Warranties vs. Replacement Warranties: A Simple Comparison," American Economic Review, American Economic Association, vol. 80(2), pages 432-436, May.
  7. Richard Schmalensee, 1981. "Monopolistic Two-Part Pricing Arrangements," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 445-466, Autumn.
  8. 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.
  9. Pascal Courty & Li Hao, 2000. "Sequential Screening," Review of Economic Studies, Oxford University Press, vol. 67(4), pages 697-717.
  10. Bonifield, Carolyn & Cole, Catherine & Schultz, Randall L., 2010. "Product returns on the Internet: A case of mixed signals?," Journal of Business Research, Elsevier, vol. 63(9-10), pages 1058-1065, September.
  11. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
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