Refunds as a Metering Device
Roman Inderst and
Gilad Tirosh
MPRA Paper from University Library of Munich, Germany
Abstract:
Firms frequently offer refunds, both when physical products are returned and when service contracts are terminated prematurely. We show how refunds act as a "metering device" when consumers learn about their personal valuation while experimenting with the product or service. Our theory predicts that low-quality firms offer inefficiently strict terms for refunds, while high-quality firms offer inefficiently generous terms. This may help to explain the observed variety in contractual terms. As in our model strict cancellation terms and low refunds are used to price discriminate, rather than to trap consumers into purchasing inferior products, the imposition of a statutory minimum refund policy would not, in general, improve consumer surplus or welfare.
Keywords: Refunds; Cancellation terms; Metering (search for similar items in EconPapers)
JEL-codes: D86 (search for similar items in EconPapers)
Date: 2011-06
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:53846
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