Offering Money-Back Guarantees in the Presence of Strategic Consumers

Abstract

This paper studies the benefits of money-back guarantees (MBGs) on the seller under the presence of strategic consumers. The seller initially can offer the MBGs or no-MBGs in the selling season but may sell the leftover inventory at a salvage price without the MBGs at the end of the season. The strategic consumers choose the purchasing timing based on their expected surplus. The authors compare the models of the MBGs offer to no-MBGs in the selling season. By characterizing the rational expectation equilibrium, they find that the seller can charge a higher price in the case of the MBGs offer compared to no-MBGs. Accordingly, the seller's stocking level is higher and thus the seller's profit has the corresponding result. This result explains why MBGs is ubiquitous in the retailing world. The effects of the parameters in the model on the profit benefit are shown in the numerical analysis.