Information Acquisition and the Excess Refund Puzzle

39 Pages Posted: 29 Mar 2005

See all articles by Steven A. Matthews

Steven A. Matthews

University of Pennsylvania - Department of Economics

Nicola G. Persico

University of Pennsylvania - Department of Economics

Date Written: March 28, 2005

Abstract

A buyer can learn her value for a returnable experience good by trying it out, with the option of returning the good for whatever refund the seller offers. Sellers tend to offer a "no questions asked" refund for such returns, a money back guarantee. The refund is often too generous, generating inefficiently high levels of returns. We present two versions of a model of a returnable goods market. In the Information Acquisition Model, consumers are ex ante identical and uninformed of their private values for the good. The firm then offers a generous refund in order to induce the consumers to learn their values by purchasing and trying the good out, rather than by doing costly research prior to purchasing. In the Screening Model, some consumers have negligible costs of becoming informed about their values prior to purchasing, and always do so; other consumers have prohibitive costs of acquiring pre-purchase information and always stay uninformed. The firm's optimal screening menu may then contain only a single contract, one that specifies a generous refund, and hence a high purchase price, in order to weaken the incentive constraint of the informed consumers.

Keywords: information acquisition, refunds, money back guarantees, returnable experience goods

JEL Classification: L1

Suggested Citation

Matthews, Steven A. and Persico, Nicola G., Information Acquisition and the Excess Refund Puzzle (March 28, 2005). Available at SSRN: https://ssrn.com/abstract=694606 or http://dx.doi.org/10.2139/ssrn.694606

Steven A. Matthews (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7749 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~stevenma

Nicola G. Persico

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

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