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

Publication Type:
Journal Article
Games and Economic Behavior, 2016, 99 pp. 224 - 238
Issue Date:
Full metadata record
Files in This Item:
Filename Description Size
1-s2.0-S0899825616300768-main.pdfPublished Version1.32 MB
Adobe PDF
© 2016 Elsevier Inc. 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.
Please use this identifier to cite or link to this item: