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Optimal sales mechanism with outside options

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  • Chang, Dongkyu

Abstract

This paper studies the optimal design of sales mechanisms when a buyer can quit a negotiation for an outside option at any time. The main results show that the profit-maximizing mechanism induces a set of buyer types to delay purchasing a good if the value of the outside option is highly dispersed among buyer types. Moreover, to prevent a buyer from quitting a negotiation, the profit-maximizing mechanism also features an upfront payment, which is compensated later by a price discount. The seller can implement the profit-maximizing mechanism by offering a declining price path or a menu of European options.

Suggested Citation

  • Chang, Dongkyu, 2021. "Optimal sales mechanism with outside options," Journal of Economic Theory, Elsevier, vol. 195(C).
    • Handle: RePEc:eee:jetheo:v:195:y:2021:i:c:s002205312100096x
    DOI: 10.1016/j.jet.2021.105279
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    References listed on IDEAS

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    Cited by:

    1. Chang, Dongkyu & Lee, Jong Jae, 2022. "Price skimming: Commitment and delay in bargaining with outside option," Journal of Economic Theory, Elsevier, vol. 205(C).

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    More about this item

    Keywords

    Delay; Option contract; Outside option; Upfront payment; Quitting right;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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