Service Cancellation and Competitive Refund Policy

Although previous research demonstrates the profitability of partial refund policies in a monopolysetting, there is a certain lack of ubiquity in practice about these refunds in competitive servicemarkets. This raises the question on how a partial refund policy may work and whether it is evensustainable in a competitive environment. This study investigates how competition may influencethe profitability and the equilibrium choice of refund policies. It is shown that partial refundsmay endogenously change the nature of strategic interaction between service providers from localmonopolies into a competition regime, which moderates the gains from exploiting the efficiency-enhancing effect of partial refunds. A whole range of pure strategy equilibria can be obtained asa result of the interplay between the efficiency-improving and the competition-intensifying effects.When the capacity is small (large) such that the efficiency-improving (the competition-intensifying)effect is dominant, both firms in equilibrium follow identical partial (zero) refund policies. Moreover,interestingly, the symmetric firms may end up in an asymmetric equilibrium in which one firm follows a partial refund policy and the other adopts a zero refund policy