Goodwill Can Hurt: A theoretical and experimental investigation of return policies in auctions

Charles Cadsby, Ninghua Du, Ruqu Wang and Jun Zhang

Games and Economic Behavior, 2016, vol. 99, issue C, 224-238

Abstract: Will generous return policies in auctions benefit bidders? We investigate this issue using second-price common-value auctions. Theoretically, we find that the symmetric bidding equilibrium is unique unless returns are free, and when returns are free there exist multiple equilibria with different implications for sellers. Moreover, more generous return policies mitigate the winner's curse, but also push the bids higher, thus hurting bidders by eroding their surplus. In the experiment, bids increase and bidders' earnings decrease with more generous return policies as predicted. With free returns, many bidders bid above the highest possible value, subsequently returning the item regardless of value. Though consistent with equilibrium behavior, this is not optimal for sellers.

Keywords: Auctions; Return policies; Common value; Experiment (search for similar items in EconPapers)
JEL-codes: C91 D44 D82 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Goodwill Can Hurt: a Theoretical and Experimental Investigation of Return Policies in Auctions (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:99:y:2016:i:c:p:224-238

DOI: 10.1016/j.geb.2016.08.002

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