Abstract
We study the use of money-back guarantees as a form of market experimentation in a market for experience goods with repeat purchases. We show that extending the customer base in the second-period by using a money-back guarantee can be optimal only if a monopolist faces an uncertain distribution of buyers. Within the second period, a money-back guarantee allows the monopolist to discriminate between new and repeat purchasers while a pure price reduction does not. Thus, whenever money-back guarantees are feasible, an optimal experimentation strategy includes a money-back guarantee in the second period but not necessarily a price reduction.
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