Money-back guarantee in the presence of strategic customer behavior

Zongsheng Huang, Lingchen Huang, Yingxue Zhao and Xiaoge Meng

International Journal of Production Economics, 2021, vol. 239, issue C

Abstract: Anticipating future clearance markdowns, customers can choose purchase timing to maximize their expected utility. Taking into account such strategic consumer behavior, this paper conducts an analytical research for the optimal design of the money-back guarantee (MBG). Our work found that the degree of strategic consumer behavior can have crucial effects on the optimization of MBG. Specifically, offering an MBG in both the regular and clearance sale periods is optimal for the seller when the customers are highly strategic; otherwise, providing an MBG is optimal only during the regular selling period. In addition, customers can benefit from MBG. In particular, offering an MBG only during the regular selling period generates the highest surplus for consumers when they are comparatively highly strategic; otherwise, offering an MBG during both the regular and clearance sale periods is preferable. Furthermore, an MBG can achieve Pareto improvement for the seller and consumers only in the regular selling period with moderately strategic customers. Compared to extant literature, the fundamental contributions of this paper are (1) the revelation that the degree of strategic customer behavior is a critical factor when designing an MBG, and (2) the development of an analytical characterization of the optimization of an MBG in response to different degrees of strategic customer behavior. Our work well substantializes the result that an MBG policy can be an effective tool for addressing strategic customer behavior.

Keywords: Mechanism design; Money-back guarantee; Strategic customer behavior (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:239:y:2021:i:c:s0925527321001675

DOI: 10.1016/j.ijpe.2021.108191

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