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Refunds as a Metering Device

Author

Listed:
  • 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.

Suggested Citation

  • Inderst, Roman & Tirosh, Gilad, 2011. "Refunds as a Metering Device," MPRA Paper 53846, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:53846
    as

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    File URL: https://mpra.ub.uni-muenchen.de/53846/1/MPRA_paper_53846.pdf
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    References listed on IDEAS

    as
    1. Che, Yeon-Koo, 1996. "Customer Return Policies for Experience Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 17-24, March.
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    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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Refunds; Cancellation terms; Metering;

    JEL classification:

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

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