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Price discrimination through communication

Author

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  • Sher, Itai

    (University of Massachusetts Amherst)

  • Vohra, Rakesh

    (Department of Economics and Department of Electrical and Systems Engineering, University of Pennsylvania)

Abstract

We study a seller's optimal mechanism for maximizing revenue when a buyer may present evidence relevant to her value. We show that a condition very close to transparency of buyer segments is necessary and sufficient for the optimal mechanism to be deterministic--hence akin to classic third degree price discrimination--independently of non-evidence characteristics. We also find another sufficient condition depending on both evidence and valuations, whose content is that evidence is hierarchical. When these conditions are violated, the optimal mechanism contains a mixture of second and third degree price discrimination, where the former is implemented via sale of lotteries. We interpret such randomization in terms of the probability of negotiation breakdown in a bargaining protocol whose sequential equilibrium implements the optimal mechanism.

Suggested Citation

  • Sher, Itai & Vohra, Rakesh, 2015. "Price discrimination through communication," Theoretical Economics, Econometric Society, vol. 10(2), May.
    • Handle: RePEc:the:publsh:1129
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Elchanan Ben-Porath & Eddie Dekel & Barton L. Lipman, 2014. "Optimal Allocation with Costly Verification," American Economic Review, American Economic Association, vol. 104(12), pages 3779-3813, December.
    2. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2017. "Optimal Allocation with Ex Post Verification and Limited Penalties," American Economic Review, American Economic Association, vol. 107(9), pages 2666-2694, September.
    3. Sher, Itai & Vohra, Rakesh, 2015. "Price discrimination through communication," Theoretical Economics, Econometric Society, vol. 10(2), May.
    4. Elchanan Ben‐Porath & Eddie Dekel & Barton L. Lipman, 2019. "Mechanisms With Evidence: Commitment and Robustness," Econometrica, Econometric Society, vol. 87(2), pages 529-566, March.
    5. Geoffrey A. Chua & Gaoji Hu & Fang Liu, 2023. "Optimal multi-unit allocation with costly verification," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 61(3), pages 455-488, October.
    6. Raymond Deneckere & Sergei Severinov, 2022. "Signalling, screening and costly misrepresentation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(3), pages 1334-1370, August.
    7. Mehdi Ayouni & Frédéric Koessler, 2017. "Hard evidence and ambiguity aversion," Theory and Decision, Springer, vol. 82(3), pages 327-339, March.
    8. repec:hal:spmain:info:hdl:2441/3709dm0u7h9t9qlfe9vrqtn8ed is not listed on IDEAS
    9. S. Nageeb Ali & Gregory Lewis & Shoshana Vasserman, 2019. "Voluntary Disclosure and Personalized Pricing," NBER Working Papers 26592, National Bureau of Economic Research, Inc.
    10. ,, 2014. "Persuasion and dynamic communication," Theoretical Economics, Econometric Society, vol. 9(1), January.
    11. repec:hal:spmain:info:hdl:2441/4kpa2fek478tla1o86g6n9jb6v is not listed on IDEAS
    12. Frédéric Koessler & Eduardo Perez-Richet, 2019. "Evidence reading mechanisms," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(3), pages 375-397, October.
    13. Herweg, Fabian & Schmidt, Klaus M., 2020. "Bayesian implementation and rent extraction in a multi-dimensional procurement problem," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    14. Jeanne Hagenbach & Frédéric Koessler & Eduardo Perez‐Richet, 2014. "Certifiable Pre‐Play Communication: Full Disclosure," Econometrica, Econometric Society, vol. 82(3), pages 1093-1131, May.
    15. Kym Pram, 2023. "Learning And Evidence In Insurance Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1685-1714, November.
    16. Sebastian Schweighofer-Kodritsch & Roland Strausz, 2023. "Principled Mechanism Design with Evidence," Berlin School of Economics Discussion Papers 0030, Berlin School of Economics.
    17. Sumit Goel & Wade Hann-Caruthers, 2020. "Project selection with partially verifiable information," Papers 2007.00907, arXiv.org, revised Feb 2022.
    18. Pram, Kym, 2021. "Disclosure, welfare and adverse selection," Journal of Economic Theory, Elsevier, vol. 197(C).
    19. Nima Haghpanah & Ron Siegel, 2022. "A Theory of Stable Market Segmentations," Papers 2210.13194, arXiv.org.
    20. Chen, Yi-Chun & Li, Jiangtao, 2018. "Revisiting the foundations of dominant-strategy mechanisms," Journal of Economic Theory, Elsevier, vol. 178(C), pages 294-317.
    21. Francisco Silva, 2020. "Self-evaluations," Documentos de Trabajo 554, Instituto de Economia. Pontificia Universidad Católica de Chile..

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    More about this item

    Keywords

    Price discrimination; communication; bargaining; commitment; evidence; network flows;
    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
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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