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Monopoly with Resale

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  • Giacomo Calzolari
  • Alessandro Pavan

Abstract

This paper illustrates the intricacies associated with the design of revenue-maximizing mechanisms for a monopolist who expects her buyers to resell in a secondary market. We consider two modes of resale: the first is to a third party who does not participate in the primary market; the second is inter-bidders resale, where the winner in the primary market resells to the losers. The main contribution is in showing how revenue-maximizing mechanisms can be designed investigating the optimal informational linkage with the secondary market. To control the price in the resale game, the monopolist must design an allocation rule and a disclosure policy that optimally fashion the beliefs of the participants in the resale market. We show that it is generically impossible to maximize revenue through deterministic selling procedures and disclosing only the decision to trade with a particular buyer. To create the optimal informational linkage, the monopolist may need to induce stochastic allocations and disclose also the price paid in the primary market. The optimal allocation rule and disclosure policy maximize the expected sum of the bidders’ resale-augmented virtual valuations under the constraints imposed by the sequential rationality of the bidders’ offers in the resale game.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1393.

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Date of creation: Jul 2004
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Handle: RePEc:nwu:cmsems:1393

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Keywords: optimal information linkage between primary and secondary markets; disclosure policy; stochastic allocations; resale-augmented virtual valuations.;

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  1. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October.
  2. Michael Schwarz & Konstantin Sonin, 2001. "The Variable Value Environment: Auctions and Actions," Working Papers w0020, Center for Economic and Financial Research (CEFIR), revised Oct 2005.
  3. Jehiel, Philippe & Moldovanu, Benny, 1995. "Resale Markets and the Assignment of Property Rights," CEPR Discussion Papers 1196, C.E.P.R. Discussion Papers.
  4. Harris, Milton & Raviv, Artur, 1981. "Allocation Mechanisms and the Design of Auctions," Econometrica, Econometric Society, vol. 49(6), pages 1477-99, November.
  5. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
  6. Haile,P.A., 1999. "Auctions with resale," Working papers 33, Wisconsin Madison - Social Systems.
  7. Jehiel, Phillipe & Moldovanu, Benny, 1997. "Auctions with Downstream Interaction among Buyers," Sonderforschungsbereich 504 Publications 97-06, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  8. Haile, Philip A., 2003. "Auctions with private uncertainty and resale opportunities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 72-110, January.
  9. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September.
  10. John McMillan, 1994. "Selling Spectrum Rights," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 145-162, Summer.
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  12. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  13. Jehiel, Philippe & Benny Moldovanu, 1994. "Strategic Non-Participation," Discussion Paper Serie B 287, University of Bonn, Germany.
  14. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
  15. Zheng, Charles Zhoucheng, 2002. "Optimal Auction with Resale," Staff General Research Papers 12664, Iowa State University, Department of Economics.
  16. 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.
  17. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Gupta, Madhurima & Lebrun, Bernard, 1999. "First price auctions with resale," Economics Letters, Elsevier, vol. 64(2), pages 181-185, August.
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