Price Adjustment Policy with Partial Refunds

Abstract

Have you ever purchased an item only to notice a short while later that its price was reduced? Many retailers offer to refund customers the full price difference as long as the discount occurred within a short period of time after the original purchase. Such policy looks attractive to consumers as it shields them from future price fluctuations. But can this policy be advantageous for the retailer?In this paper we investigate the price difference refund policy (commonly referred to as price adjustment) and demonstrate how it can result in a higher profit even if all consumers request and receive a price adjustment.Further, the existing literature and practice both assume that if a price adjustment policy is employed, the consumers should get the full price difference refunded. In this paper we endogenize the refund amount, allowing the retailer to determine the optimal percentage of the price difference to be returned to consumers. We fully characterize the conditions under which it is optimal to offer a partial or greater than full price adjustment to customers as well as the optimal refund percentage. Additionally, we demonstrate that the practice of limiting the price adjustment option to a short period after the purchase incident is not necessarily in the best interest of retailers.