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Screening with an Approximate Type Space

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  • Kristóf Madarász
  • Andrea Prat

Abstract

We re-visit the single-agent mechanism design problem with quasi-linear preferences, but we assume that the principal knowingly operates on the basis of only an approximate type space rather than the (potentially complex) truth. We propose a two-step scheme, the profit-participation mechanism, whereby: (i) the principal .takes the model seriously and computes the optimal menu for the approximate type space; (ii) but she discounts the price of each allocation proportionally to the profit that the allocation would yield in the approximate model. We characterize the bound to the profit loss and show that it vanishes smoothly as the distance between the approximate type space and the true type space converges to zero. Instead, we show that it is not a valid approximation to simply act as if the model was correct.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number /2010/548.

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Date of creation: Jun 2010
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Handle: RePEc:cep:stitep:/2010/548

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  1. Dirk Bergemann & Karl Schlag, 2005. "Robust Monopoly Pricing," Cowles Foundation Discussion Papers 1527RR, Cowles Foundation for Research in Economics, Yale University, revised Sep 2008.
  2. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  3. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  4. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  5. Nisan, Noam & Segal, Ilya, 2006. "The communication requirements of efficient allocations and supporting prices," Journal of Economic Theory, Elsevier, vol. 129(1), pages 192-224, July.
  6. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
  7. Gregory Dobson & Shlomo Kalish, 1993. "Heuristics for Pricing and Positioning a Product-Line Using Conjoint and Cost Data," Management Science, INFORMS, vol. 39(2), pages 160-175, February.
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Cited by:
  1. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
  2. Garicano, Luis & Prat, Andrea, 2011. "Organizational Economics with Cognitive Costs," CEPR Discussion Papers 8372, C.E.P.R. Discussion Papers.
  3. L. Elisa Celis & Gregory Lewis & Markus M. Mobius & Hamid Nazerzadeh, 2012. "Buy-it-now or Take-a-chance: Price Discrimination through Randomized Auctions," NBER Working Papers 18590, National Bureau of Economic Research, Inc.

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