Service Shutdowns and Compensation: Cash Refunds or Vouchers?

Abstract

Government mandated shutdowns in response to the COVID-19 pandemic have led to a vast number of service cancellations and a heated debate on compensation policies. Service providers pushed for vouchers as a means of compensation, whereas customers demand cash refunds or generous vouchers that compensate for postponed service. Regulators, at the same time, insist that customers must be granted the right to be reimbursed in money. To address the debate, this paper develops an analytical framework to study the profitability and efficiency of different compensation policies following shutdown. Surprisingly, we find that the voucher-only policy dominates the hybrid policy that offers customers the choice between a cash-back and a voucher option in terms of profit and welfare if customers have high salvage values for the service. We also find that if the regulator imposes cash-back as an option for compensation, it is optimal for the provider to include a bonus in the voucher. In contrast, the provider will not offer a bonus in the absence of a cash-back option. Overall, our analysis helps to evaluate compensation policies from the perspectives of pre-shutdown efficiency, post-shutdown customer dissatisfaction, and possible compromise between market participants.