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Return Policy as a Signaling Device in Horizontally Differentiated Products

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  • Sawoong Kang

    (Handong Global University)

Abstract

We consider a market for horizontally differentiated product in which the information about the location of the product is asymmetric between a monopolist and buyers. The vertical characteristic of the product (i.e., quality) is assumed to be common knowledge. Product differentiation is modeled a la Hotelling. Three types of sellers are assumed: A and C at two endpoints and B at the center. We analyze two signaling games, one with price being a signaling device and another with return policy. We show that return policy is a more efficient signaling device than price. When return policy can be adopted, (a) for most parameter values, there exists a separating equilibrium in which only seller B uses the return policy; (b) A pooling equilibrium in which all sellers use the return policy also exists; (c) Whenever return policy is adopted by some seller, it improves social welfare.

Suggested Citation

  • Sawoong Kang, 2006. "Return Policy as a Signaling Device in Horizontally Differentiated Products," Korean Economic Review, Korean Economic Association, vol. 22, pages 409-436.
    • Handle: RePEc:kea:keappr:ker-200612-22-2-09
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Return policy; Signaling; Horizontal Differentiation;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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