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Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds under Asymmetric Information

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  • Linda A. Welling

Abstract

Refunds are modeled as a competitive market response to asymmetric information. Firms have private information on their choice of product quality, and compete by offering pricerefund contracts. Consumers who care about quality draw inferences about the quality offered by the various firms from observed contracts. Conditions under which a revealing market equilibrium emerges are specified, and the equilibrium quality and contract(s) characterized. The model predicts that when product risk is not insurable, consumers with higher incomes will pay higher prices for higher-quality goods, with higher refunds if the product fails.

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  • Linda A. Welling, 1989. "Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds under Asymmetric Information," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 62-78, February.
    • Handle: RePEc:cje:issued:v:22:y:1989:i:1:p:62-78
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    Cited by:

    1. Rachel R. Chen & Eitan Gerstner & Yinghui (Catherine) Yang, 2009. "—Should Captive Sardines Be Compensated? Serving Customers in a Confined Zone," Marketing Science, INFORMS, vol. 28(3), pages 599-608, 05-06.
    2. Huifang Jiao & Xuan Wang & Chi To Ng & Lijun Ma, 2021. "Pricing and Return Policies in a Competitive Market: A Consumer-Valuation Based Analysis with Valuation Uncertainties," Sustainability, MDPI, vol. 13(3), pages 1-23, January.
    3. Rachel R. Chen & Eitan Gerstner & Yinghui (Catherine) Yang, 2012. "Customer Bill of Rights Under No-Fault Service Failure: Confinement and Compensation," Marketing Science, INFORMS, vol. 31(1), pages 157-171, January.
    4. Aidan Hollis, 1996. "Exclusivity Restrictions in Markets with Adverse Selection: The Case of Extended Warranties," Working Papers ecpap-96-03, University of Toronto, Department of Economics.

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