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

Author

Listed:
  • C. Bram Cadsby

    () (Department of Economics and Finance, University of Guelph)

  • Ninghua Du

    () (Laboratory of Mathematical Economics and School of Economics, Shanghai University of Finance and Economics)

  • Ruqu Wang

    () (Department of Economics, Queen?s University)

  • Jun Zhang

    () (Economics Discipline Group, School of Business, University of Technology Sydney)

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.

Suggested Citation

  • C. Bram Cadsby & Ninghua Du & Ruqu Wang & Jun Zhang, 2015. "Goodwill Can Hurt: a Theoretical and Experimental Investigation of Return Policies in Auctions," Working Papers 1501, University of Guelph, Department of Economics and Finance.
  • Handle: RePEc:gue:guelph:2015-01
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    References listed on IDEAS

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    Keywords

    Auctions; Return Policies; Common Value; Experiment;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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