Common Value Auctions With Return Policies

QED Working Paper Number
1235

This paper examines the role of return policies in common value auctions. We first characterize the unique symmetric equilibrium in first-price and second-price auctions with continuous signals and discrete common values when certain return policies are provided. We then examine how the return policies affect a seller’s revenue. When the lowest common value is zero, a more generous return policy generates a higher seller’s revenue; the full refund policy extracts all the surplus and therefore implements the optimal selling mechanism; given any return policy, a second-price auction generates a higher revenue than a first-price auction. In a second-price auction where the lowest common value is not zero but still smaller than the seller’s reservation value, then a more generous return policy also generates a higher revenue; otherwise, the optimal return policy could be a full refund, no refund or partial refund policy.

Author(s)

Jun Zhang

JEL Codes

Keywords

return policies
auctions
refund

Working Paper

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