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Optimal Pricing Mechanisms with Unknown Demand

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  • Ilya Segal
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    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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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282803322156963
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    Bibliographic 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

    Note: DOI: 10.1257/000282803322156963
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    References

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    1. Perloff, Jeffrey M & Salop, Steven, 1984. "Equilibrium with product differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt4cq0m6s3, Department of Agricultural & Resource Economics, UC Berkeley.
    2. Motty Perry & Philip J. Reny, 2002. "An Efficient Auction," Econometrica, Econometric Society, vol. 70(3), pages 1199-1212, May.
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    Cited by:
    1. Jeff Ely, 2003. "Foundations of Dominant Strategy Mechanisms," Theory workshop papers 658612000000000064, UCLA Department of Economics.
    2. Goldberg, Andrew V. & Hartline, Jason D. & Karlin, Anna R. & Saks, Michael & Wright, Andrew, 2006. "Competitive auctions," Games and Economic Behavior, Elsevier, vol. 55(2), pages 242-269, May.
    3. Xinyu Hua, 2004. "Strategic Ex-ante Contracts: Rent-Extraction and Opportunity Costs," Econometric Society 2004 North American Summer Meetings 564, Econometric Society.
    4. Auriol, Emmanuelle & Gary-Bobo, Robert, 2001. "On Robust Constitution Design," IDEI Working Papers 136, Institut d'Économie Industrielle (IDEI), Toulouse, revised Aug 2006.
    5. Oksana Loginova & Curtis Taylor, 2008. "Price experimentation with strategic buyers," Review of Economic Design, Springer, vol. 12(3), pages 165-187, September.
    6. Bergemann, Dirk & Schlag, Karl, 2011. "Robust monopoly pricing," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2527-2543.
    7. Lazzati, Natalia & Van Essen, Matt, 2014. "A nearly optimal auction for an uninformed seller," Economics Letters, Elsevier, vol. 122(3), pages 396-399.
    8. Jason D. Hartline, 2012. "Approximation in Mechanism Design," American Economic Review, American Economic Association, vol. 102(3), pages 330-36, May.
    9. Benny Moldovanu & Alex Gershkov, 2008. "The Trade-off Between Fast Learning and Dynamic Efficiency," 2008 Meeting Papers 348, Society for Economic Dynamics.
    10. Gershkov, Alex & Moldovanu, Benny, 2012. "Optimal search, learning and implementation," Journal of Economic Theory, Elsevier, vol. 147(3), pages 881-909.
    11. Blumrosen, Liad & Feldman, Michal, 2013. "Mechanism design with a restricted action space," Games and Economic Behavior, Elsevier, vol. 82(C), pages 424-443.
    12. Aggarwal, Gagan & Fiat, Amos & Goldberg, Andrew V. & Hartline, Jason D. & Immorlica, Nicole & Sudan, Madhu, 2011. "Derandomization of auctions," Games and Economic Behavior, Elsevier, vol. 72(1), pages 1-11, May.
    13. Timothy Salmon & Bart Wilson, 2008. "Second chance offers versus sequential auctions: theory and behavior," Economic Theory, Springer, vol. 34(1), pages 47-67, January.

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