Consumer protection versus competition: the case of mandatory refunds

Mandatory refund policies have received a lot of attention from both policymakers and academics. Despite this, little is known about how sellers strategically respond to the policy and the resulting effects on competition. To address this, we analyze mandatory refund policies in a framework that flexibly accommodates the full competition spectrum. We show that the policy can benefit consumers in uncompetitive markets under certain conditions, despite reducing social welfare and profits. Nevertheless, we also demonstrate how the policy can be detrimental to consumers, even in very uncompetitive markets. Intuitively, while the policy always protects consumers from some bad outcomes post-purchase, sellers respond by increasing their prices and so consumers have less chance of obtaining a good deal pre-purchase.