This paper analyzes contract cancellation and product return policies in markets in which sellers advise buyers about the suitability of the products sold. By granting buyers the right to cancel or return on favorable terms, the sellers cheap talk at the point of sale becomes more credible. When all buyers are wary of the sellers incentives, equilibrium contractual provisions are second-best efficient, but involve excessive purchases (ex ante inefficiency) and excessive returns (interim inefficiency). Imposition of a minimum statutory standard (even if not binding) can improve welfare and consumer surplus by reducing sellers incentives to target credulous buyers.
Sales talk, cancellation terms, and the role of consumer protection
OTTAVIANI, MARCO M.
2009
Abstract
This paper analyzes contract cancellation and product return policies in markets in which sellers advise buyers about the suitability of the products sold. By granting buyers the right to cancel or return on favorable terms, the sellers cheap talk at the point of sale becomes more credible. When all buyers are wary of the sellers incentives, equilibrium contractual provisions are second-best efficient, but involve excessive purchases (ex ante inefficiency) and excessive returns (interim inefficiency). Imposition of a minimum statutory standard (even if not binding) can improve welfare and consumer surplus by reducing sellers incentives to target credulous buyers.
I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
