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Direct marketing is witnessing explosive growth. As consumers increasingly purchase products from their homes, their ability to judge the quality of products they buy is significantly reduced. In this paper we study how money-back guarantees can signal product quality in such environments. We interpret product quality broadly to mean both the level of attributes promised as well as the firm's consistency in delivering on those promises. Key aspects of our formulation are the explicit consideration of transaction costs, and alternative signals of product quality. Transaction costs are the costs the seller or buyer faces when redeeming a money-back guarantee. We show that money-back guarantees signal quality by exploiting the higher probability of returns for a lower quality product, and the attendant higher transaction costs. However, if the seller's transaction costs are very large, then there are less costly ways to signal, namely charging a high price. We compare the signaling performance of (1) price, (2) price with uninformative advertising, and (3) price with a money-back guarantee. Whereas uninformative advertising does not work at all in our model, under certain conditions a money-back guarantee is necessary to signal, and under other conditions, a money-back guarantee is a useful supplement to price.money back guarantee, warranty, signaling quality, transaction costs, separating equilibrium

In this paper we study how performance requirements may improve the working of a distribution channel when the retailer is better informed about demand conditions than the manufacturer. Performance requirements means that the manufacturer and retailer agree to (1) have the manufacturer set requirements on retail price or service or both, and (2) jointly invest in the information systems required to monitor the retailer's compliance with the requirements. We show that performance requirements on price and service will improve channel performance. But if requirements cannot be set on both performance dimensions, the choice among the remaining options is not straightforward. Price requirements may be worse than no requirements, and service requirements no better. The central problem with setting requirements on only one dimension is that the retailer then behaves suboptimally on the other. Between the two partial options, service requirements are better than price requirements in aligning the interests of the manufacturer and the retailer, whereas price requirements are better at inducing the retailer to reveal his demand.pay-for-performance, distribution channels

I provide a general formulation of the channel pass-through problem as a comparative static of the retail price equilibrium, and I analyze the impact of category management and retail competition on pass-through, focusing on brand and retailer differences, and the nature of the cost change being passed through—whether it is brand specific, retailer specific, both, or neither. With category management, a retailer's response to a brand-specific cost change is not limited to that brand; in general, a retailer will also change the prices of other brands. The cross-brand effect can be positive or negative, and, depending on its sign, it either enhances or attenuates pass-through. I explain the cross-brand effect as an interaction between two forces: a demand-substitution force that pushes for a negative cross-brand effect, and a strategic-complementarity force that pushes for a positive cross-brand effect. Retail competition adds another layer of strategic complementarity, causing other retailers to respond even for retailer-specific cost changes and increasing pass-through of categorywide cost changes. But its effect for brand-specific cost changes is ambiguous. I apply the theory to two commonly used demand functions—linear demand and nested logit—and show that they have significantly different pass-through properties. The paper concludes with a discussion of how the theory relates to the empirical literature, including the companion piece by Besanko et al. (Besanko, D., J-P. Dubé, S. Gupta. 2005. Own-brand and cross-brand retail pass-through. (1) 123–137.)pass-through, retailing, category management, game theory

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