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Refunds and returns in a vertically differentiated industry

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  • Inderst, Roman
  • Tirosh, Gilad

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.

Suggested Citation

  • Inderst, Roman & Tirosh, Gilad, 2015. "Refunds and returns in a vertically differentiated industry," International Journal of Industrial Organization, Elsevier, vol. 38(C), pages 44-51.
    • Handle: RePEc:eee:indorg:v:38:y:2015:i:c:p:44-51
    DOI: 10.1016/j.ijindorg.2014.12.002
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    References listed on IDEAS

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    Cited by:

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    3. Tai‐Liang Chen & Zuyi Huang, 2020. "Technology licensing or cost‐reducing outsourcing? Game theoretical analysis on consumers' home bias effects and firms' optimal strategies," Bulletin of Economic Research, Wiley Blackwell, vol. 72(4), pages 417-433, October.

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