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Refunds as a Metering Device

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  • 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
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    References listed on IDEAS

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    More about this item

    Keywords

    Refunds; Cancellation terms; Metering;
    All these keywords.

    JEL classification:

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

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