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

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  • Cadsby, C. Bram
  • Du, Ninghua
  • Wang, Ruqu
  • Zhang, Jun

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.

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  • Cadsby, C. Bram & Du, Ninghua & Wang, Ruqu & Zhang, Jun, 2016. "Goodwill Can Hurt: A theoretical and experimental investigation of return policies in auctions," Games and Economic Behavior, Elsevier, vol. 99(C), pages 224-238.
    • Handle: RePEc:eee:gamebe:v:99:y:2016:i:c:p:224-238
    DOI: 10.1016/j.geb.2016.08.002
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    More about this item

    Keywords

    Auctions; Return policies; Common value; Experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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