Sales Talk, Cancellation Terms and the Role of Consumer Protection

Roman Inderst and Marco Ottaviani

The Review of Economic Studies, 2013, vol. 80, issue 3, 1002-1026

Abstract: This article analyses contract cancellation and product return policies in markets in which sellers advise customers about the suitability of their offering. When customers are fully rational, it is optimal for sellers to offer the right to cancel or return on favourable terms. A generous return policy makes the seller's "cheap talk" at the point of sale credible. This observation provides a possible explanation for the excess refund puzzle and also has implications for the management of customer reviews. When customers are credulous, instead, sellers have an incentive to set unfavourable terms to exploit the inflated beliefs they induce in their customers. The imposition of a minimum statutory standard improves welfare and consumer surplus when customers are credulous. In contrast, competition policy reduces contractual inefficiencies with rational customers, but it is not effective with credulous customers. Copyright 2013, Oxford University Press.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (45)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdt005 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Sales Talk, Cancellation Terms, and the Role of Consumer Protection (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:80:y:2013:i:3:p:1002-1026

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().