Optimal Second-degree Price Discrimination and Arbitrage: On the Role of Asymmetric Information among Buyers
AbstractThe 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, that is, to coordinate their purchases and to reallocate the goods. In this paper, we design the optimal sale mechanism which takes into account both individual and coalition incentive compatibility when buyers can form a coalition under asymmetric information. 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 (hence there exists potential room for arbitrage), 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 InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 21.
Date of creation: Nov 2001
Date of revision:
Other versions of this item:
- Doh-Shin Jeon & Domenico Menicucci, 2005. "Optimal Second-Degree Price Discrimination and Arbitrage: On the Role of Asymmetric Information Among Buyers," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 337-360, Summer.
- Doh Shin Jeon & Domenico Menicucci, 2001. "Optimal second-degree price discrimination and arbitrage: On the role of asymetric information among buyers," Economics Working Papers 624, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005.
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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