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Revenue Maximizing with Return Policy When Buyers Have Uncertain Valuations

28 Pages Posted: 13 Jun 2016  

Jun Zhang

University of Technology Sydney

Date Written: August 1, 2013

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 fist study the case where the salvage value is exogenously determined. We and 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.

Keywords: Auctions, Mechanism Design, Return Policies, Uncertain Valuations

JEL Classification: C72, D44, D82, D83, L12

Suggested Citation

Zhang, Jun, Revenue Maximizing with Return Policy When Buyers Have Uncertain Valuations (August 1, 2013). Available at SSRN: https://ssrn.com/abstract=2793651 or http://dx.doi.org/10.2139/ssrn.2793651

Jun Zhang (Contact Author)

University of Technology Sydney ( email )

EDG, School of Business
University of Technology Sydney
Sydney, NSW
Australia

HOME PAGE: http://www.zhangjun.weebly.com

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