Working Paper: CEPR ID: DP13641
Authors: Roman Inderst; Florian Hoffmann
Abstract: Embedding consumer experimentation with a product or service into a market environment, we find that unregulated contracts induce too few returns or cancellations, as they do not internalize a pecuniary externality on other firms in the market. Forcing firms to let consumers learn longer by imposing a commonly observed statutory minimum cancellation or refund period is socially efficient only when firms appropriate much of the market surplus, while it backfires otherwise. Interestingly, cancellation rights are a poor predictor of competition, as in the unregulated outcome firms grant particularly generous rights when competition is neither too low nor too high.
Keywords: Consumer Rights; Cancellation Policies; Market Regulation
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unregulated contracts (D86) | cancellation likelihood (D81) |
| forcing firms to extend cancellation periods (G32) | social efficiency (D61) |
| cancellation rights (D18) | competition (L13) |
| extending cancellation rights (D18) | consumer experimentation (C91) |
| consumer learning technologies (C91) | cancellation likelihood (D81) |