Common Value Auctions With Return Policies

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