Optimal Refund Mechanism

Qianjun Lyu
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Qianjun Lyu: Institute for Microeconomics, University of Bonn

No 214, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: This paper studies the optimal refund mechanism when an uninformed buyer can privately acquire information about his valuation over time. In principle, a refund mechanism can specify the odds that the seller requires the product returned while issuing a (partial) refund, which we call stochastic return. It guarantees the seller a strictly positive minimum revenue and facilitates intermediate buyer learning. In the benchmark model, stochastic return is sub-optimal. The optimal refund mechanism takes simple forms: the seller either deters learning via a well-designed non-refundable price or encourages full learning and escalates price discrimination via free return. This result is robust to both good news and bad news framework.

Keywords: buyer learning; refund contract; information design; implementable mechanism (search for similar items in EconPapers)
JEL-codes: D82 D86 L15 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2022-12
New Economics Papers: this item is included in nep-com, nep-des, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:214

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