Partial Refunds or Money-Back Guarantees ?

Abstract

A partial-refund policy is superior to a "full money-back policy when

a seller faces a significant amount of opportunistic return behavior-i.e.,

consumers order a product for short term usage only to return it for a

refund later. In a partial-refund policy, the seller charges a rent (the

nonrefundable portion of price) to those who return the product; this

discourages opportunistism, but also penalizes consumers who only

return because merchandise is unsatisfactory. The optimal partial

refund policy balances this tradeoff. Profit is higher under the partial

refund policy because of a lower number of returns and because a

higher price can be charged. Mail-order clothing and personal computer

industries demonstrate that catalogers typically offer only partial

refunds.