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Optimal Contracting Of New Experience Goods

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  • Deb, Rahul

Abstract

We model new experience goods in the context of dynamic mechanism design. These are goods for which an agent is unsure of her valuation but can learn it through consumption experience. We consider a dynamic environment with a single buyer and seller in which contracting occurs over T periods, where each time the agent consumes the object, she receives a signal which allows her to revise her valuation. In this setting, experimentation with the product is strategic both for the buyer and seller. We derive the efficient and seller optimal contracts and compare them. We present a simple two period example which highlights some of the key features of the model. Finally, the methodology developed in the paper can be used to design efficient and optimal contracts in a multi-buyer setting with learning, where each buyer has single unit demand and there is a single object for sale in each period.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9880.

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Date of creation: 04 Aug 2008
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Handle: RePEc:pra:mprapa:9880

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Related research

Keywords: Dynamic mechanism design; new experience goods; bandit problems;

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References

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  1. Pascal Courty & Li Hao, 1997. "Sequential screening," Economics Working Papers 224, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords," American Economic Review, American Economic Association, vol. 97(1), pages 242-259, March.
  3. Alessandro Pavan, 2007. "Long Term Contracting in a Changing World," Discussion Papers 1493, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Dirk Bergemann & Juuso Valimaki, 2007. "Dynamic Marginal Contribution Mechanism," Cowles Foundation Discussion Papers 1616, Cowles Foundation for Research in Economics, Yale University.
  5. Susan Athey & Ilya Segal, 2007. "An Efficient Dynamic Mechanism," Levine's Bibliography 122247000000001134, UCLA Department of Economics.
  6. Marco Battaglini, 2003. "Long-Term Contracting with Markovian Consumers," Theory workshop papers 505798000000000048, UCLA Department of Economics.
  7. repec:bla:restud:v:74:y:2007:i:3:p:705-731 is not listed on IDEAS
  8. Börgers, Tilman & Cox, Ingemar & Pesendorfer, Martin & Petricek, Vaclav, 2008. "Equilibrium Bids in Sponsored Search Auctions: Theory and Evidence," MPRA Paper 29125, University Library of Munich, Germany.
  9. Dirk Bergemann & Juuso Valimaki, 2006. "Bandit Problems," Cowles Foundation Discussion Papers 1551, Cowles Foundation for Research in Economics, Yale University.
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