Some (Un)intended Consequences of Refund Policies with Price Advertising

This paper provides a theoretical analysis of a mandatory refund policy's effects on competition and welfare in markets with price advertising. As consistent with conventional wisdom, when advertising costs are sufficiently high, then a mandated refund policy helps consumers. However, for sufficiently low advertising costs, this paper shows that the detrimental effect of the policy intervention on competition results in significantly higher prices that outweigh the direct benefits of a return option. These results highlight the importance of analyzing consumer protection interventions, while considering the competition effects, and shows how paternalistic interventions can be detrimental to consumer welfare in some cases.