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Sequentially Optimal Mechanisms

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  • Vasiliki Skreta

Abstract

We characterize the revenue maximizing mechanism in a two-period model. A risk neutral seller owns one unit of a durable good and faces a risk neutral buyer whose valuation is private information. The seller has all the bargaining power; she designs an institution to sell the object at t0 but she cannot commit not to change the institution at t1 if trade does not occur at t0. The seller's objective is to pick the revenue maximizing mechanism. We show that if the probability density function of the buyer's valuation satisfies certain conditions, the optimal mechanism is to post a price in each period. Previous work has examined price dynamics when the seller behaves sequentially rationally. We provide a reason for the seller's choice to post a price even though she can use infinitely many other possible institutions: posted price selling is the optimal strategy in the sense that it maximizes the seller's revenues. Keywords: mechanism design, optimal auctions, sequential rationality.

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Paper provided by www.najecon.org in its series NajEcon Working Paper Reviews with number 391749000000000488.

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Date of creation: 04 Aug 2010
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Handle: RePEc:cla:najeco:391749000000000488

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  1. Bester, Helmut & Strausz, Roland, 2007. "Contracting with imperfect commitment and noisy communication," Journal of Economic Theory, Elsevier, vol. 136(1), pages 236-259, September.
  2. Myerson, Roger B., 1994. "Communication, correlated equilibria and incentive compatibility," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 2, chapter 24, pages 827-847 Elsevier.
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  12. Faruk Gul & Hugo Sonnenschein & Robert Wilson, 2010. "Foundations of Dynamic Monopoly and the Coase Conjecture," Levine's Working Paper Archive 232, David K. Levine.
  13. Skreta, Vasiliki, 2006. "Mechanism design for arbitrary type spaces," Economics Letters, Elsevier, vol. 91(2), pages 293-299, May.
  14. R. Preston McAfee & Daniel Vincent, 1994. "Sequentially Optimal Auctions," Discussion Papers 1104, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  16. Jean-Jacques LAFFONT & Jean TIROLE, 1990. "Adverse Selection and Renegotiation in Procurement," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9005, Université de Lausanne, Faculté des HEC, DEEP.
  17. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September.
  18. Riley, John & Zeckhauser, Richard, 1983. "Optimal Selling Strategies: When to Haggle, When to Hold Firm," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 267-89, May.
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Cited by:
  1. Vasiliki Skreta, 2013. "Optimal Auction Design Under Non-Commitment," Working Papers 13-08, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Boone, J. & Shapiro, J., 2006. "Selling to Consumers with Endogenous Types," Discussion Paper 2006-74, Tilburg University, Center for Economic Research.
  3. Mylovanov, Tymofiy & Tröger, Thomas, 2006. "A Characterization of the Conditions for Optimal Auction with Resale," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 128, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Vasiliki Skreta, 2007. "Optimal Auctions with General Distributions," Levine's Bibliography 843644000000000227, UCLA Department of Economics.
  5. Bisin, Alberto & Rampini, Adriano A., 2006. "Markets as beneficial constraints on the government," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 601-629, May.
  6. Jenny Simon, 2011. "Financial Markets as a Commitment Device for the Government," 2011 Meeting Papers 447, Society for Economic Dynamics.
  7. Robert Evans & Sonje Reiche, 2013. "Mechanism Design and Non-Cooperative Renegotiation," Cambridge Working Papers in Economics 1331, Faculty of Economics, University of Cambridge.

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