We consider a market for horizontally differentiated product in which the
information about the location of the product is asymmetric between a
monopolist and buyers. The vertical characteristic of the product (i.e.,
quality) is assumed to be common knowledge. Product differentiation is
modeled a la Hotelling. Three types of sellers are assumed: A and C at two
endpoints and B at the center. We analyze two signaling games, one with
price being a signaling device and another with return policy. We show that
return policy is a more efficient signaling device than price. When return
policy can be adopted, (a) for most parameter values, there exists a
separating equilibrium in which only seller B uses the return policy; (b) A
pooling equilibrium in which all sellers use the return policy also exists; (c)
Whenever return policy is adopted by some seller, it improves social welfare.