Customer return policies for experience goods

This paper studies the economic rationale for customer return policies, by focusing on the ''experience goods'' aspect of many products. Return policies allow consumers to defer their purchasing decisions until after they gain some experience with goods. In so doing, they insure consumers against ex post loss, which allows a monopoly seller to charge more than otherwise. It is shown that the seller adopts the return policy when consumers are highly risk averse or retail costs are high. Consumers are strictly better off under the return policy, but there is too little adoption of the policy in equilibrium.