Service Shutdowns and Compensation

This paper compares compensation policies from the perspective of providers and policy makers in an environment with the risk of exogenous service shutdowns. Providers tend to push for vouchers as a means of compensation, whereas customers demand cash refunds or generous vouchers. Regulators, at the same time, insist that customers must be granted the right to be reimbursed in money. To address the debate, this paper develops an analytical model to explore how cash refunds and vouchers can be used for recovery from service failures. First, we show that if the regulator does not require offering cash-back as an option, the optimal voucher policy consists of a service replacement with a zero bonus, whereas a positive bonus is optimal if the cash-back option is mandatory. Second, we find that the voucher-only policy can be more profitable and efficient than the hybrid policy that offers customers a choice between cash-back and voucher. Third, we show that the voucher policy leads to the longest survival time under shutdown, followed by the selling as-is policy and then the hybrid policy, whereas the cash-back policy leads to the shortest survival time. Overall, our results show that the expected profit and survival time are two important dimensions for providers to consider when facing the risk of shutdowns, whereas policy makers want to focus on pre-shutdown efficiency, bankruptcy risk, and post-shutdown customer dissatisfaction.