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Discussion Paper Details

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Title: Robust Pricing with Refunds

Author(s): Toomas Hinnosaar and Keiichi Kawai

Publication Date: April 2020

Keyword(s): information design, mechanism design, Monopoly, Optimal Pricing, refunds, return policies and robustness

Programme Area(s): Industrial Organization

Abstract: Before purchase, a buyer of an experience good learns about the product's fit using various information sources, including some of which the seller may be unaware of. The buyer, however, can conclusively learn the fit only after purchasing and trying out the product. We show that the seller can use a simple mechanism to best take advantage of the buyer's post-purchase learning to maximize his guaranteed-profit. We show that this mechanism combines a generous refund, which performs well when the buyer is relatively informed, with non-refundable random discounts, which work well when the buyer is relatively uninformed.

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Bibliographic Reference

Hinnosaar, T and Kawai, K. 2020. 'Robust Pricing with Refunds'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14615