Sales Talk, Cancellation Terms, and the Role of Consumer Protection

Roman Inderst and Marco Ottaviani

No 465, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: This paper 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 favorable 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 unfavorable 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. Keywords: Cheap talk, advice, marketing, credulity, contract cancellation, refund, return policy, consumer protection. JEL Classi?cation: D18 (Consumer Protection), D83 (Search; Learning; Information and Knowledge), L15 (Information and Product Quality), L51 (Economics of Regulation).

Date: 2012
New Economics Papers: this item is included in nep-cta and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://repec.unibocconi.it/igier/igi/wp/2012/465.pdf (application/pdf)

Related works:
Journal Article: Sales Talk, Cancellation Terms and the Role of Consumer Protection (2013)
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:igi:igierp:465

Ordering information: This working paper can be ordered from
https://repec.unibocconi.it/igier/igi/

Access Statistics for this paper

More papers in Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University via Rontgen, 1 - 20136 Milano (Italy).
Bibliographic data for series maintained by ().