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 regulators. Providers prefer vouchers as a means of service recovery to limit bankruptcy risk, whereas customers demand cash refunds or vouchers that include a generous bonus. Regulators, on the other hand, insist that customers must be granted the right to be reimbursed in cash. This paper shows that a zero bonus is optimal under the voucher-only strategy, whereas the provider should always include a positive bonus with the voucher under the hybrid strategy that allows customers to choose between the cash refund and voucher options. Surprisingly, despite its higher flexibility in service recovery design, the hybrid strategy can be dominated by the voucher-only strategy in terms of profit and welfare. Moreover, we show that the ranking of strategies 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.