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Optimal Second-Degree Price Discrimination and Arbitrage: On the Role of Asymmetric Information Among Buyers

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  • Doh-Shin Jeon

    ()
    (Universitat Pompeu Fabra)

  • Domenico Menicucci

    ()
    (Universita` degli Studi di Firenze)

Abstract

The traditional theory of second-degree price discrimination tackles individual self-selection but does not address the possibility that buyers could form a coalition to conduct arbitrage. We study the optimal sale mechanism that takes into account both individual and coalition incentive compatibility. We show that the monopolist can achieve the same profit regardless of whether or not buyers can form a coalition. Although marginal rates of substitution are not equalized across buyers of different types in the optimal sale mechanism, they fail to realize the gains from arbitrage because of the transaction costs in coalition formation generated by asymmetric information.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 36 (2005)
Issue (Month): 2 (Summer)
Pages: 337-360

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Handle: RePEc:rje:randje:v:36:y:2005:2:p:337-360

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References

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  2. Sandro Brusco & Giuseppe Lopomo, 2002. "Collusion via Signalling in Simultaneous Ascending Bid Auctions with Heterogeneous Objects, with and without Complementarities," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 407-436.
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Cited by:
  1. Yeon-Koo Che & Jinwoo Kim, 2006. "Optimal Collusion-Proof Auctions," Discussion Papers, Columbia University, Department of Economics 0506-22, Columbia University, Department of Economics.
  2. Meng, Dawen & Tian, Guoqiang, 2008. "Nonlinear Pricing with Arbitrage: On the Role of Correlation," MPRA Paper 41207, University Library of Munich, Germany.
  3. Jansen, Jos & Jeon, Doh-Shin & Menicucci, Domenico, 2008. "The organization of regulated production: Complementarities, correlation and collusion," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(1), pages 327-353, January.
  4. Jeon, Doh-Shin & Menicucci, Domenico, 2013. "When Is Building a Library Consortium Bene cial?," TSE Working Papers, Toulouse School of Economics (TSE) 13-425, Toulouse School of Economics (TSE), revised 07 Apr 2014.
  5. Dequiedt, V., 2006. "Efficient collusion in optimal auctions," Working Papers, Grenoble Applied Economics Laboratory (GAEL) 200607, Grenoble Applied Economics Laboratory (GAEL).
  6. Hu, Audrey & Offerman, Theo & Onderstal, Sander, 2011. "Fighting collusion in auctions: An experimental investigation," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 29(1), pages 84-96, January.

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