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Sequential screening

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  • Pascal Courty
  • Li Hao

Abstract

We present a model of price discrimination where a monopolist faces a consumer who is privately informed about the distribution of his valuation for an indivisible unit of good but has yet to learn privately the actual valuation. The monopolist sequentially screens the consumer with a menu of contracts: the consumer self-selects once by choosing a contract and then self-selects again when he learns the actual valuation. A deterministic sequential mechanism is a menu of refund contracts, each consisting of an advance payment and a refund amount in case of no consumption, but sequential mechanisms may involve randomization. We characterize the optimal sequential mechanism when some consumer types are more eager in the sense of first-order stochastic dominance, and when some types face greater valuation uncertainty in the sense of mean-preserving-spread. We show that it can be optimal to subsidize consumer types with smaller valuation uncertainty (through low refund, as in airplane ticket pricing) in order to reduce the rent to those with greater uncertainty. The size of distortion depends both on the type distribution and on how informative the consumer's initial private knowledge is about his valuation, but not on how much he initially knows about the valuation per se.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 224.

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Date of creation: May 1997
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Handle: RePEc:upf:upfgen:224

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Web page: http://www.econ.upf.edu/

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Keywords: Price--discrimination; mechanism--design; demand--uncertainty;

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  3. Eugenio J. Miravete, 1995. "Screening Consumers through Alternative Pricing Mechanisms," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1145, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  15. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, Econometric Society, vol. 49(1), pages 33-64, January.
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  17. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, Econometric Society, vol. 66(4), pages 783-826, July.
  18. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, Elsevier, vol. 46(2), pages 335-354, December.
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