Goodwill Can Hurt: a Theoretical and Experimental Investigation of Return Policies in Auctions

Charles Cadsby, Ninghua Du (), Ruqu Wang () and Jun Zhang ()
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Ninghua Du: Laboratory of Mathematical Economics and School of Economics, Shanghai University of Finance and Economics
Ruqu Wang: Department of Economics, Queen?s University

No 1501, Working Papers from University of Guelph, Department of Economics and Finance

Abstract: Will generous return policies in auctions benefit bidders? We investigate this issue using second-price common-value auctions. Theoretically, we find that the bidding equilibrium is unique unless returns are free, in which case there exist multiple equilibria with different implications for sellers. Moreover, more generous return policies hurt bidders by eroding consumer surplus through higher bids. 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 D72 D82 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2015
New Economics Papers: this item is included in nep-exp
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Journal Article: Goodwill Can Hurt: A theoretical and experimental investigation of return policies in auctions (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:gue:guelph:2015-01

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