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Regulating Cancellation Rights With Consumer Experimentation

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  • Florian Hoffmann
  • Roman Inderst
  • Sergey Turlo

Abstract

Embedding consumer experimentation with a product or service into a market environment, we find that unregulated contracts induce too little returns or cancellations, as they do not internalize a pecuniary externality on other firms in the market. Forcing firms to let consumers learn longer by imposing a commonly observed statutory minimum cancellation or refund period is socially efficient only when firms appropriate much of the market surplus, while it backfires otherwise. Interestingly, cancellation rights are a poor predictor of competition, as in the unregulated outcome firms grant particularly generous rights when competition is neither too low nor too high. The overarching theme of our analysis is that both the individual benefits and the welfare consequences of (consumer) experimentation depend crucially on the consumer's reservation value, which is endogenous in a market environment.

Suggested Citation

  • Florian Hoffmann & Roman Inderst & Sergey Turlo, 2018. "Regulating Cancellation Rights With Consumer Experimentation," CRC TR 224 Discussion Paper Series crctr224_2018_045, University of Bonn and University of Mannheim, Germany.
  • Handle: RePEc:bon:boncrc:crctr224_2018_045
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    More about this item

    Keywords

    Consumer experimentation; cancellation rights; market equilibrium; externality; regulation; consumer protection;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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