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Optimal Second-degree Price Discrimination and Arbitrage: On the Role of Asymmetric Information among Buyers

  • Doh-Shin Jeon
  • Domenico Menicucci

The traditional theory of second-degree price discrimination tackles individual self selection but does not address the possibility that buyers could form a coalition to conduct arbitrage, that is, to coordinate their purchases and to reallocate the goods. In this paper, we design the optimal sale mechanism which takes into account both individual and coalition incentive compatibility when buyers can form a coalition under asymmetric information. We show that the monopolist can achieve the same profit regardless of whether or not buyers can form a coalition. Although marginal rates of substitution are not equalized across buyers of different types in the optimal sale mechanism (hence there exists potential room for arbitrage), they fail to realize the gains from arbitrage because of the transaction costs in coalition formation generated by asymmetric information.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 21.

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Date of creation: Nov 2001
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Handle: RePEc:bge:wpaper:21
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  1. Sandro Brusco & Giuseppe Lopomo, 2002. "Collusion via Signalling in Simultaneous Ascending Bid Auctions with Heterogeneous Objects, with and without Complementarities," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 407-436.
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  6. Innes, Robert & Sexton, Richard J., 1993. "Customer coalitions, monopoly price discrimination and generic entry deterrence," European Economic Review, Elsevier, vol. 37(8), pages 1569-1597, December.
  7. Innes, Robert & Sexton, Richard J, 1994. "Strategic Buyers and Exclusionary Contracts," American Economic Review, American Economic Association, vol. 84(3), pages 566-84, June.
  8. Patrick Rey & Jean Tirole, 1985. "The Logic of Vertical Restraints," Working papers 396, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Zheng, Charles Zhoucheng, 2002. "Optimal Auction with Resale," Staff General Research Papers 12664, Iowa State University, Department of Economics.
  10. 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.
  11. Laffont, Jean-Jacques & Martimort, David, 1998. "Mechanism Design with Collusion and Correlation," IDEI Working Papers 81, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Peter Cramton & Thomas R. Palfrey, 1995. "Ratifiable Mechanisms: Learning from Disagreement," Papers of Peter Cramton 95geb, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  13. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  14. Varian, Hal R, 2000. "Buying, Sharing and Renting Information Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 473-88, December.
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