462 / 2024-04-25 15:44:11

Returning Credit versus Returning Cash in a Competitive Environment

Refund policies, Cash refund, Credit refund, Competitive strategy, Welfare analysis

Consumers often receive either credit or cash refunds for product returns or service cancellations. When receiving the credit, consumers enjoy price deductions in future purchases if they remember to redeem within the expiration term. Receiving cash offers immediate freedom in fund allocation as desired. These refund policies significantly influence consumer behavior and firm profitability. Thus, this study delves into the optimal design of refund policies, specifically examining the choice between refunding credit and refunding cash in a competitive market setting. Our investigation centers on the dynamic interactions between consumers and firms, considering two competing firms offering horizontally differentiated products over time. Employing a model of the repeated interactions across two periods, we analyze the impact of consumers' forgetfulness rates, cash freedom, and exogenous return rates on firms' pricing and refund decisions. Our analysis reveals several noteworthy insights. First, equilibrium choices regarding refunding cash or credit are symmetric, contingent upon consumer perceptions of cash freedom and forgetfulness rates. Notably, a prisoner's dilemma scenario arises when credit refunds dominate due to weak cash freedom and moderate forgetfulness among consumers. Second, cash refunds consistently offer full reimbursement, whereas credit refunds tend to provide partial reimbursements, particularly when forgetfulness rates are low. Third, despite a decrease in consumer surplus with higher return rates, firms' profits and overall social welfare may increase under cash refund equilibrium. Finally, compared to credit refunds, cash refund policies hold the potential for a triple-win outcome, benefiting firms, consumers, and overall societal welfare.