Refunds as a Metering Device

23 Pages Posted: 14 Feb 2014

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Gilad Tirosh

Goethe University Frankfurt - House of Finance

Date Written: June 2011

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 fi…rms offer inefficiently generous terms. This may help to explain the observed variety in contractual terms. As in our model strict cancellation terms and low refunds are used to price discriminate, rather than to trap consumers into purchasing inferior products, the imposition of a statutory minimum refund policy would not, in general, improve consumer surplus or welfare.

Keywords: Refunds, Cancellation terms, Metering

Suggested Citation

Inderst, Roman and Tirosh, Gilad, Refunds as a Metering Device (June 2011). Available at SSRN: https://ssrn.com/abstract=2395282 or http://dx.doi.org/10.2139/ssrn.2395282

Roman Inderst (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Gilad Tirosh

Goethe University Frankfurt - House of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, DE 60323
Germany

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