Regulating Cancellation Rights With Consumer Experimentation

Florian Hoffmann (), Roman Inderst and Sergey Turlo ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Embedding consumer experimentation with a product or service into a market environment, we find that unregulated contracts induce too little returns or cancellations, as they do not internalize a pecuniary externality on other firms in the market. Forcing firms to let consumers learn longer by imposing a commonly observed statutory minimum cancellation or refund period is socially efficient only when firms appropriate much of the market surplus, while it backfires otherwise. Interestingly, cancellation rights are a poor predictor of competition, as in the unregulated outcome firms grant particularly generous rights when competition is neither too low nor too high. The overarching theme of our analysis is that both the individual benefits and the welfare consequences of (consumer) experimentation depend crucially on the consumer's reservation value, which is endogenous in a market environment.

Keywords: Consumer experimentation; cancellation rights; market equilibrium; externality; regulation; consumer protection (search for similar items in EconPapers)
JEL-codes: D82 D86 L51 (search for similar items in EconPapers)
Pages: 46
Date: 2018-10
New Economics Papers: this item is included in nep-cta, nep-mic and nep-reg
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Working Paper: Regulating Cancellation Rights with Consumer Experimentation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2018_045

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