Managing Service Shutdowns: Cash Refunds or Vouchers?

Abstract

Service shutdowns -- extended disruptions of operations -- caused by exogenous events are on the rise. Such shutdowns pose major challenges for service providers, customers, and policymakers. Providers tend to push for vouchers as a means of service recovery to limit bankruptcy risk, whereas customers demand cash refunds or vouchers that include a generous bonus. Policymakers, on the other hand, insist that customers must be granted the right to be reimbursed in money. This paper shows that a zero bonus is optimal under the voucher-only policy, whereas the provider should always include a positive bonus with the voucher under a hybrid policy that allows customers to choose between a cash refund and a voucher. Surprisingly, despite its higher flexibility in service recovery design, the hybrid policy can be dominated by the voucher-only policy in terms of profit and welfare. Moreover, we show that the ranking of policies differs across the two important dimensions of expected profit and survival under shutdown. Finally, we study competition among providers and show that a high-quality provider is more likely to use cash-back as the service recovery strategy than its low-quality competitor.

Keywords: Service Failure and Recovery, Service Shutdown, Cash Refund, Voucher, Service Replacement.