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Optimal Pricing Mechanisms with Unknown Demand

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Author Info
Ilya Segal
Abstract

The standard profit-maximizing multiunit auction intersects the submitted demand curve with a preset reservation supply curve, which is determined using the distribution from which the buyers' valuations are drawn. However, when this distribution is unknown, a preset supply curve cannot maximize monopoly profits. The optimal pricing mechanism in this situation sets a price for each buyer on the basis of the demand distribution inferred statistically from other buyers' bids. The resulting profit converges to the optimal monopoly profit with known demand as the number of buyers goes to infinity, and convergence can be substantially faster than with sequential price experimentation.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 93 (2003)
Issue (Month): 3 (June)
Pages: 509-529
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Handle: RePEc:aea:aecrev:v:93:y:2003:i:3:p:509-529

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  1. Perloff, Jeffrey M & Salop, Steven C, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 52(1), pages 107-20, January. [Downloadable!] (restricted)
  2. Motty Perry & Philip J. Reny, 2002. "An Efficient Auction," Econometrica, Econometric Society, vol. 70(3), pages 1199-1212, May. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jeffrey C. Ely & Kim-Sau Chung, 2004. "Foundations of Dominant Strategy Mechanisms," Econometric Society 2004 North American Summer Meetings 169, Econometric Society. [Downloadable!]
    Other versions:
  2. Dirk Bergemann & Karl Schlag, 2005. "Robust Monopoly Pricing: The Case of Regret," Economics Working Papers ECO2005/10, European University Institute. [Downloadable!]
  3. Lixin Ye, 2004. "Optimal Auctions with Endogenous Entry," Contributions to Theoretical Economics, Berkeley Electronic Press, vol. 4(1), pages 1158-1158. [Downloadable!] (restricted)
  4. Sandeep Baliga & Rakesh Vohra, 2003. "Market Research and Market Design," Advances in Theoretical Economics, Berkeley Electronic Press, vol. 3(1), pages 1059-1059. [Downloadable!] (restricted)
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  5. Dirk Bergemann & Karl Schlag, 2005. "Robust Monopoly Pricing," Cowles Foundation Discussion Papers 1527R, Cowles Foundation, Yale University, revised Apr 2007. [Downloadable!]
    Other versions:
  6. Oksana Loginova & Curtis R. Taylor, 2005. "Price Experimentation with Strategic Buyers," Working Papers 0509, Department of Economics, University of Missouri. [Downloadable!]
    Other versions:
  7. Xinyu Hua, 2004. "Strategic Ex-ante Contracts: Rent-Extraction and Opportunity Costs," Econometric Society 2004 North American Summer Meetings 564, Econometric Society. [Downloadable!]
  8. Timothy Salmon & Bart Wilson, 2008. "Second chance offers versus sequential auctions: theory and behavior," Economic Theory, Springer, vol. 34(1), pages 47-67, January. [Downloadable!] (restricted)
  9. Mark Bagnoli & Ted Bergstrom, 2004. "Log-concave Probability and its Applications," University of California at Santa Barbara, Economics Working Paper Series 1989D, Department of Economics, UC Santa Barbara. [Downloadable!]
    Other versions:
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