Refunds and returns in a vertically differentiated industry |
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| Institution: | 1. Johann Wolfgang Goethe University Frankfurt, Germany;2. Imperial College London, United Kingdom;1. Departamento de Dirección y Gestión de Empresas, Facultad de Economía y Empresa, Universidad Diego Portales, Avenida Santa Clara 797, 8580000 Huechuraba, Chile;2. Universidad Alberto Hurtado, Erasmo Escala 1835, 8340539 Santiago, Chile;1. Aix-Marseille University, Aix-Marseille School of Economics, CNRS, EHESS, France;2. Department of Economics, McGill University, Montreal H3A 2T7, Canada;3. Cef.up, Economics Department, University of Porto, Portugal |
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| Abstract: | Firms frequently offer refunds, both when physical products are returned and when service contracts are terminated prematurely. We show how refunds act as a “metering device” when consumers learn about their personal valuation while experimenting with the product or service. Our theory predicts that low-quality firms offer inefficiently strict terms for refunds, while high-quality firms offer inefficiently generous terms. This may help to explain the observed variety in contractual terms. |
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