Information Acquisition and the Excess Refund Puzzle

Steven Matthews () and Nicola Persico

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: A buyer can learn her value for a returnable experience good by trying it out, with the option of returning the good for whatever refund the seller offers. Sellers tend to offer a “no questions asked†refund for such returns, a money back guarantee. The refund is often too generous, generating inefficiently high levels of returns. We present two versions of a model of a returnable goods market. In the Information Acquisition Model, consumers are ex ante identical and uninformed of their private values for the good. The firm then offers a generous refund in order to induce the consumers to learn their values by purchasing and trying the good out, rather than by doing costly research prior to purchasing. In the Screening Model, some consumers have negligible costs of becoming informed about their values prior to purchasing, and always do so; other consumers have prohibitive costs of acquiring pre-purchase information and always stay uninformed. The firm’s optimal screening menu may then contain only a single contract, one that specifies a generous refund, and hence a high purchase price, in order to weaken the incentive constraint of the informed consumers.

Keywords: information acquisition; refunds; money back guarantees; returnable experience goods (search for similar items in EconPapers)
JEL-codes: L1 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2005-03-28
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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