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Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds Under Asymmetric Information

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  • Linda A. Welling

Abstract

Refunds are modelled as a market response to asymmetric information. A firm's choice of product reliability is private information, and not verifiable. Firms compete by offering price-refund contracts; consumers draw inferences about quality from the observed contracts. In equilibrium, quality is revealed by the contracts, prices, refunds and (unobserved) quality are predicted to be positively correlated with income when consumers care about quality. The paper then discusses "new and improved" products when consumers cannot observe technology. Without additional sources of information, product quality may be too high in equilibrium.

Suggested Citation

  • Linda A. Welling, 1986. "Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds Under Asymmetric Information," Working Paper 668, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:668
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    Cited by:

    1. Rachel R. Chen & Eitan Gerstner & Yinghui (Catherine) Yang, 2012. "Customer Bill of Rights Under No-Fault Service Failure: Confinement and Compensation," Marketing Science, INFORMS, vol. 31(1), pages 157-171, January.
    2. Rachel R. Chen & Eitan Gerstner & Yinghui (Catherine) Yang, 2009. "—Should Captive Sardines Be Compensated? Serving Customers in a Confined Zone," Marketing Science, INFORMS, vol. 28(3), pages 599-608, 05-06.
    3. Aidan Hollis, 1996. "Exclusivity Restrictions in Markets with Adverse Selection: The Case of Extended Warranties," Working Papers ecpap-96-03, University of Toronto, Department of Economics.
    4. Huifang Jiao & Xuan Wang & Chi To Ng & Lijun Ma, 2021. "Pricing and Return Policies in a Competitive Market: A Consumer-Valuation Based Analysis with Valuation Uncertainties," Sustainability, MDPI, vol. 13(3), pages 1-23, January.

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