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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
  • Domenico Menicucci

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, 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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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 21.

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Date of creation: Nov 2001
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Handle: RePEc:bge:wpaper:21

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  1. Patrick Rey & Jean Tirole, 1985. "The Logic of Vertical Restraints," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 396, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Jean-Jacques Laffont & David Martimort, 2000. "Mechanism Design with Collusion and Correlation," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 309-342, March.
  3. Laffont & Martimort, 1997. "Collusion under asymmetric information," Working Papers, Institut National de la Recherche Agronomique, France 152574, Institut National de la Recherche Agronomique, France.
  4. 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.
  5. Cramton, Peter C. & Palfrey, Thomas R., 1990. "Ratifiable Mechanisms: Learning from Disagreement," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 731, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Bernard Caillaud & Philippe Jehiel, 1998. "Collusion in Auctions with Externalities," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 680-702, Winter.
  7. Zheng, Charles Zhoucheng, 2002. "Optimal Auction with Resale," Staff General Research Papers, Iowa State University, Department of Economics 12664, Iowa State University, Department of Economics.
  8. Bakos, Yannis & Brynjolfsson, Erik & Lichtman, Douglas, 1999. "Shared Information Goods," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 42(1), pages 117-55, April.
  9. Innes, Robert & Sexton, Richard J, 1994. "Strategic Buyers and Exclusionary Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 566-84, June.
  10. Innes, Robert & Sexton, Richard J., 1993. "Customer coalitions, monopoly price discrimination and generic entry deterrence," European Economic Review, Elsevier, Elsevier, vol. 37(8), pages 1569-1597, December.
  11. McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 579-99, June.
  12. Lawrence M. Ausubel & Peter Cramton, 1998. "The Optimality of Being Efficient," Papers of Peter Cramton 98wpoe, University of Maryland, Department of Economics - Peter Cramton, revised 18 Jun 1999.
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  14. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
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Cited by:
  1. Meng, Dawen & Tian, Guoqiang, 2008. "Nonlinear Pricing with Arbitrage: On the Role of Correlation," MPRA Paper 41207, University Library of Munich, Germany.
  2. Dequiedt, Vianney, 2007. "Efficient collusion in optimal auctions," Journal of Economic Theory, Elsevier, Elsevier, vol. 136(1), pages 302-323, September.
  3. Yeon-Koo Che & Jinwoo Kim, 2006. "Optimal Collusion-Proof Auctions," Discussion Papers, Columbia University, Department of Economics 0506-22, Columbia University, Department of Economics.
  4. 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.
  5. Jeon, Doh-Shin & Menicucci, Domenico, 2013. "When Is Building a Library Consortium Bene ficial?," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 791, Institut d'Économie Industrielle (IDEI), Toulouse, revised 07 Apr 2014.
  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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