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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:

    1. Toomas Hinnosaar & Keiichi Kawai, 2020. "Robust pricing with refunds," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1014-1036, December.
    2. Sanxi Li & Jun Yu & Mingsheng Zhang, 2024. "Search Prominence with Costly Product Returns," Papers 2410.06791, arXiv.org.
    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.
    4. Bird, Davina & Garrod, Luke & Wilson, Chris M, 2024. "Consumer protection versus competition: the case of mandatory refunds," MPRA Paper 122125, University Library of Munich, Germany.
    5. Petrikaitė, Vaiva, 2018. "A search model of costly product returns," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 236-251.

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