Revenue maximizing with return policy when buyers have uncertain valuations

Zhang, J

Revenue maximizing with return policy when buyers have uncertain valuations

Zhang, J

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Publication Type:: Journal Article
Citation:: International Journal of Industrial Organization, 2013, 31 (5), pp. 452 - 461
Issue Date:: 2013-09-16

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Field	Value	Language
dc.contributor.author	Zhang, J https://orcid.org/0000-0002-7528-3653	en_US
dc.date.issued	2013-09-16	en_US
dc.identifier.citation	International Journal of Industrial Organization, 2013, 31 (5), pp. 452 - 461	en_US
dc.identifier.issn	0167-7187	en_US
dc.identifier.uri	http://hdl.handle.net/10453/116160
dc.description.abstract	This paper examines the optimal mechanism design problem when buyers have uncertain valuations. This uncertainty can only be resolved after the actual transactions take place and upon incurring significant post-purchase cost. We focus on two different settings regarding how the seller values a returned object (salvage value). We first study the case where the salvage value is exogenously determined. We find that the revenue maximizing mechanism is deterministic and "separable". We illustrate that the optimal revenue can be implemented by a mechanism with a "no-questions-asked" return policy. In addition, we show that "linear return policies" are suboptimal when the hazard rates of initial estimates are monotone. We next examine the case where the salvage value is endogenously determined. We demonstrate that "separability" no longer holds and the "recall" of buyers is necessary in the optimal mechanism. © 2013 Published by Elsevier B.V.	en_US
dc.relation.ispartof	International Journal of Industrial Organization	en_US
dc.relation.isbasedon	10.1016/j.ijindorg.2013.08.001	en_US
dc.subject.classification	Economics	en_US
dc.title	Revenue maximizing with return policy when buyers have uncertain valuations	en_US
dc.type	Journal Article
utslib.citation.volume	5	en_US
utslib.citation.volume	31	en_US
utslib.for	1401 Economic Theory	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1403 Econometrics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
utslib.copyright.status	closed_access
pubs.issue	5	en_US
pubs.publication-status	Published	en_US
pubs.volume	31	en_US

Abstract:

This paper examines the optimal mechanism design problem when buyers have uncertain valuations. This uncertainty can only be resolved after the actual transactions take place and upon incurring significant post-purchase cost. We focus on two different settings regarding how the seller values a returned object (salvage value). We first study the case where the salvage value is exogenously determined. We find that the revenue maximizing mechanism is deterministic and "separable". We illustrate that the optimal revenue can be implemented by a mechanism with a "no-questions-asked" return policy. In addition, we show that "linear return policies" are suboptimal when the hazard rates of initial estimates are monotone. We next examine the case where the salvage value is endogenously determined. We demonstrate that "separability" no longer holds and the "recall" of buyers is necessary in the optimal mechanism. © 2013 Published by Elsevier B.V.

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http://hdl.handle.net/10453/116160