Information Acquisition and the Excess Refund Puzzle

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 o¤ers. Sellers tend to o¤er a “no questions asked” refund for such returns, a money back guarantee. The refund is often too generous, generating ine¢ ciently 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 …rm then o¤ers 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 …rm’s optimal screening menu may then contain only a single contract, one that speci…es a generous refund, and hence a high purchase price, in order to weaken the incentive constraint of the informed consumers.