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Screening with an Approximate Type Space


  • Madarász, Kristóf
  • Prat, Andrea


We re-visit the single-agent mechanism design problem with quasilinear preferences, but we assume that the principal knowingly operates on the basis of only an approximate type space rather than the (potentially complex) truth. We propose a two-step scheme, the profit-participation mechanism, whereby: (i) the principal `takes the model seriously' and computes the optimal menu for the approximate type space; (ii) but she discounts the price of each allocation proportionally to the profit that the allocation would yield in the approximate model. We characterize the bound to the profit loss and show that it vanishes smoothly as the distance between the approximate type space and the true type space converges to zero. Instead, we show that it is not a valid approximation to simply act as if the model was correct.

Suggested Citation

  • Madarász, Kristóf & Prat, Andrea, 2010. "Screening with an Approximate Type Space," CEPR Discussion Papers 7900, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7900

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    References listed on IDEAS

    1. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
    2. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
    3. Dirk Bergemann & Karl Schlag, 2012. "Robust Monopoly Pricing," World Scientific Book Chapters,in: Robust Mechanism Design The Role of Private Information and Higher Order Beliefs, chapter 13, pages 417-441 World Scientific Publishing Co. Pte. Ltd..
    4. Mark Armstrong, 1999. "Price Discrimination by a Many-Product Firm," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 151-168.
    5. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
    6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    7. Nisan, Noam & Segal, Ilya, 2006. "The communication requirements of efficient allocations and supporting prices," Journal of Economic Theory, Elsevier, vol. 129(1), pages 192-224, July.
    8. Gregory Dobson & Shlomo Kalish, 1993. "Heuristics for Pricing and Positioning a Product-Line Using Conjoint and Cost Data," Management Science, INFORMS, vol. 39(2), pages 160-175, February.
    9. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
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    Cited by:

    1. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1661-1710.
    2. L. Elisa Celis & Gregory Lewis & Markus Mobius & Hamid Nazerzadeh, 2014. "Buy-It-Now or Take-a-Chance: Price Discrimination Through Randomized Auctions," Management Science, INFORMS, vol. 60(12), pages 2927-2948, December.
    3. Marco Battaglini & Rohit Lamba, 2012. "Optimal Dynamic Contracting," Working Papers 1431, Princeton University, Department of Economics, Econometric Research Program..
    4. Dirk Bergemann & Ji Shen & Yun Xu & Edmund M. Yeh, 2015. "Nonlinear Pricing with Finite Information," Cowles Foundation Discussion Papers 1981, Cowles Foundation for Research in Economics, Yale University.
    5. Prat, Andrea, 2014. "Media Power," CEPR Discussion Papers 10094, C.E.P.R. Discussion Papers.
    6. Garicano, Luis & Prat, Andrea, 2011. "Organizational Economics with Cognitive Costs," CEPR Discussion Papers 8372, C.E.P.R. Discussion Papers.

    More about this item


    computational complexity; mechanism design; model uncertainty; nonlinear pricing; screening;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design


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