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Price Discrimination Through Communication

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  • Itai Sher
  • Rakesh Vohra

Abstract

We study a seller's optimal mechanism for maximizing revenue when the buyer may present evidence relevant to the buyer's value, or when different types of buyer have a differential ability to communicate. We introduce a dynamic bargaining protocol in which the buyer first makes a sequence of concessions in a cheap talk phase, and then at a time determined by the seller, the buyer presents evidence to support his previous assertions, and then the seller makes a take-it-or-leave-it offer. Our main result is that the optimal mechanism can be implemented as a sequential equilibrium of our dynamic bargaining protocol. Unlike the optimal mechanism to which the seller can commit, the equilibrium of the bargaining protocol also provides incentives for the seller to behave as required. We thereby provide a natural procedure whereby the seller can optimally price discriminate on the basis of the buyer's evidence. JEL Code: C78, D82, D83.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1536.

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Date of creation: 01 Jun 2011
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Handle: RePEc:nwu:cmsems:1536

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Keywords: price discrimination; communication; bargaining; commitment; evidence; network flows;

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References

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  1. Sher, Itai, 2014. "Persuasion and dynamic communication," Theoretical Economics, Econometric Society, vol. 9(1), January.
  2. Celik, Gorkem, 2006. "Mechanism design with weaker incentive compatibility constraints," Games and Economic Behavior, Elsevier, vol. 56(1), pages 37-44, July.
  3. Kos, Nenad, 2012. "Communication and efficiency in auctions," Games and Economic Behavior, Elsevier, vol. 75(1), pages 233-249.
  4. Elchanan Ben-Porath & Barton L. Lipman, 2009. "Implementation and Partial Provability," Boston University - Department of Economics - Working Papers Series wp2009-002, Boston University - Department of Economics.
  5. Green, Jerry R & Laffont, Jean-Jacques, 1986. "Partially Verifiable Information and Mechanism Design," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 447-56, July.
  6. Sergei Severinov & Raymond Deneckere, 2006. "Screening when some agents are nonstrategic: does a monopoly need to exclude?," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 816-840, December.
  7. Barton L. Lipman & Elchanan Ben-Porath, 2010. "Implementation with Partial Provability," Boston University - Department of Economics - Working Papers Series WP2010-018, Boston University - Department of Economics.
  8. Nirvikar Singh & Donald Wittman, 2001. "original papers : Implementation with partial verification," Review of Economic Design, Springer, vol. 6(1), pages 63-84.
  9. Jacob Glazer & Ariel Rubinstein, 2004. "On Optimal Rules of Persuasion," Econometrica, Econometric Society, vol. 72(6), pages 1715-1736, November.
  10. Itai Sher & Rakesh Vohra, 2011. "Price Discrimination Through Communication," Discussion Papers 1536, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Dino Gerardi & Johannes Horner & Lucas Maestri, 2010. "The Role of Commitment in Bilateral Trade," Levine's Working Paper Archive 661465000000000117, David K. Levine.
  12. Bull, Jesse & Watson, Joel, 2002. "Hard Evidence and Mechanism Design," University of California at San Diego, Economics Working Paper Series qt7715f08f, Department of Economics, UC San Diego.
  13. Sher, Itai, 2011. "Credibility and determinism in a game of persuasion," Games and Economic Behavior, Elsevier, vol. 71(2), pages 409-419, March.
  14. Ausubel, Lawrence M. & Deneckere, Raymond J., 1989. "A direct mechanism characterization of sequential bargaining with one-sided incomplete information," Journal of Economic Theory, Elsevier, vol. 48(1), pages 18-46, June.
  15. Forges, Françoise & Koessler, Frédéric, 2005. "Communication equilibria with partially verifiable types," Economics Papers from University Paris Dauphine 123456789/168, Paris Dauphine University.
  16. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  17. Kartik, Navin & Tercieux, Olivier, 2012. "Implementation with evidence," Theoretical Economics, Econometric Society, vol. 7(2), May.
  18. Moore, John, 1984. "Global Incentive Constraints in Auction Design," Econometrica, Econometric Society, vol. 52(6), pages 1523-35, November.
  19. repec:rje:randje:v:37:y:2006:i:4:p:816-840 is not listed on IDEAS
  20. Lipman Barton L. & Seppi Duane J., 1995. "Robust Inference in Communication Games with Partial Provability," Journal of Economic Theory, Elsevier, vol. 66(2), pages 370-405, August.
  21. Rubinstein, Ariel & Glazer, Jacob, 2006. "A study in the pragmatics of persuasion: a game theoretical approach," Theoretical Economics, Econometric Society, vol. 1(4), pages 395-410, December.
  22. Pai, Mallesh M. & Vohra, Rakesh, 2014. "Optimal auctions with financially constrained buyers," Journal of Economic Theory, Elsevier, vol. 150(C), pages 383-425.
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Cited by:
  1. Sher, Itai & Vohra, Rakesh, 0. "Price discrimination through communication," Theoretical Economics, Econometric Society.
  2. Sher, Itai, 2014. "Persuasion and dynamic communication," Theoretical Economics, Econometric Society, vol. 9(1), January.

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