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Dynamic Screening with Limited Commitment

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  • Rahul Deb
  • Maher Said

Abstract

We examine a model of dynamic screening and price discrimination in which the seller has limited commitment power. Two cohorts of anonymous, patient, and risk-neutral buyers arrive over two periods. Buyers in the first cohort arrive in period one, are privately informed about the distribution of their values, and then privately learn the value realizations in period two. Buyers in the second cohort are ``last-minute shoppers'' that already know their values upon their arrival in period two. The seller can fully commit to a long-term contract with buyers in the first cohort, but cannot commit to the future contractual terms that will be offered to second-cohort buyers. The expected second-cohort contract serves as an endogenous type-dependent outside option for first-cohort buyers, reducing the seller's ability to extract rents via sequential contracts. We derive the seller-optimal equilibrium and show that the seller mitigates this effect by inducing some first-cohort buyers to strategically delay their time of contracting---the seller manipulates the timing of contracting in order to endogenously generate a commitment to maintaining high future prices. The seller's optimal contract pools low types, separates high types, and induces intermediate types to delay contracting.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-485.

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Length: Unknown pages
Date of creation: 09 May 2013
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Handle: RePEc:tor:tecipa:tecipa-485

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Related research

Keywords: Asymmetric information; Dynamic mechanism design; Limited commitment; Sequential screening; Type-dependent participation;

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  1. Raphael Boleslavsky & Maher Said, 2013. "Progressive Screening: Long-Term Contracting with a Privately Known Stochastic Process," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 1-34.
  2. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 67, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Riley, John & Zeckhauser, Richard, 1983. "Optimal Selling Strategies: When to Haggle, When to Hold Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(2), pages 267-89, May.
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  7. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, Econometric Society, vol. 69(4), pages 1077-98, July.
  8. Simon Board, 2008. "Durable-Goods Monopoly with Varying Demand," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 391-413.
  9. Alex Gershkov & Benny Moldovanu, 2009. "Learning about the Future and Dynamic Efficiency," American Economic Review, American Economic Association, American Economic Association, vol. 99(4), pages 1576-87, September.
  10. Butz, David A, 1990. "Durable-Good Monopoly and Best-Price Provisions," American Economic Review, American Economic Association, American Economic Association, vol. 80(5), pages 1062-76, December.
  11. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, Econometric Society, vol. 70(2), pages 583-601, March.
  12. Besanko, David, 1985. "Multi-period contracts between principal and agent with adverse selection," Economics Letters, Elsevier, Elsevier, vol. 17(1-2), pages 33-37.
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