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Optimal Mechanism for Selling Two Goods

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  • Pavlov Gregory

    ()
    (University of Western Ontario)

Abstract

We solve for the optimal mechanism for selling two goods when the buyer’s demand characteristics are unobservable. In the case of substitutable goods, the seller has an incentive to offer lotteries over goods in order to charge the buyers with large differences in the valuations a higher price for obtaining their desired good with certainty. However, the seller also has a countervailing incentive to make the allocation of the goods among the participating buyers more efficient in order to increase the overall demand. In the case when the buyer can consume both goods, the seller has an incentive to underprovide one of the goods in order to charge the buyers with large valuations a higher price for the bundle of both goods. As in the case of substitutable goods, the seller also has a countervailing incentive to lower the price of the bundle in order to increase the overall demand.

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Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 11 (2011)
Issue (Month): 1 (February)
Pages: 1-35

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Handle: RePEc:bpj:bejtec:v:11:y:2011:i:1:n:3

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  1. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  2. Mathias Dewatripont & Lars Peter Hansen & Stephen Turnovsky, 2003. "Advances in economics and econometrics: the eighth world congress," ULB Institutional Repository 2013/9557, ULB -- Universite Libre de Bruxelles.
  3. McAfee, R Preston & McMillan, John & Whinston, Michael D, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 371-83, May.
  4. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
  5. Gregory Pavlov, 2006. "Optimal Mechanism for Selling Substitutes," Boston University - Department of Economics - Working Papers Series WP2006-014, Boston University - Department of Economics.
  6. Pavlov Gregory, 2011. "A Property of Solutions to Linear Monopoly Problems," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-18, February.
  7. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
  8. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  9. Thanassoulis, John, 2004. "Haggling over substitutes," Journal of Economic Theory, Elsevier, vol. 117(2), pages 217-245, August.
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Cited by:
  1. Sergiu Hart & Philip J. Reny, 2012. "Maximal Revenue with Multiple Goods: Nonmonotonicity and Other Observations," Levine's Working Paper Archive 786969000000000625, David K. Levine.
  2. Pavlov Gregory, 2011. "A Property of Solutions to Linear Monopoly Problems," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-18, February.
  3. Hurkens, Sjaak & Jeon, Doh-Shin & Menicucci, Domenico, 2013. "Dominance and Competitive Bundling," IDEI Working Papers 790, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Armstrong, Mark, 2012. "A more general theory of commodity bundling," MPRA Paper 37375, University Library of Munich, Germany.
  5. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
  6. Domenico Menicucci & Sjaak Hurkens & Doh-Shin Jeon, 2014. "On the Optimality of Pure Bundling for a Monopolist," Working Papers 771, Barcelona Graduate School of Economics.

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