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Price Discrimination Through Communication

Author

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  • Itai Sher
  • Rakesh Vohra

Abstract

We study a seller's optimal mechanism for maximizing revenue when the buyer may present evidence relevant to the buyer's value, or when different types of buyer have a differential ability to communicate. We introduce a dynamic bargaining protocol in which the buyer first makes a sequence of concessions in a cheap talk phase, and then at a time determined by the seller, the buyer presents evidence to support his previous assertions, and then the seller makes a take-it-or-leave-it offer. Our main result is that the optimal mechanism can be implemented as a sequential equilibrium of our dynamic bargaining protocol. Unlike the optimal mechanism to which the seller can commit, the equilibrium of the bargaining protocol also provides incentives for the seller to behave as required. We thereby provide a natural procedure whereby the seller can optimally price discriminate on the basis of the buyer's evidence. JEL Code: C78, D82, D83.

Suggested Citation

  • Itai Sher & Rakesh Vohra, 2011. "Price Discrimination Through Communication," Discussion Papers 1536, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1536
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    References listed on IDEAS

    as
    1. Celik, Gorkem, 2006. "Mechanism design with weaker incentive compatibility constraints," Games and Economic Behavior, Elsevier, vol. 56(1), pages 37-44, July.
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    Citations

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    Cited by:

    1. Elchanan Ben-Porath & Eddie Dekel & Barton L. Lipman, 2014. "Optimal Allocation with Costly Verification," American Economic Review, American Economic Association, vol. 104(12), pages 3779-3813, December.
    2. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2017. "Optimal Allocation with Ex Post Verification and Limited Penalties," American Economic Review, American Economic Association, vol. 107(9), pages 2666-2694, September.
    3. Sher, Itai & Vohra, Rakesh, 2015. "Price discrimination through communication," Theoretical Economics, Econometric Society, vol. 10(2), May.
    4. Sher, Itai, 2014. "Persuasion and dynamic communication," Theoretical Economics, Econometric Society, vol. 9(1), January.
    5. Jeanne Hagenbach & Frédéric Koessler & Eduardo Perez‐Richet, 2014. "Certifiable Pre‐Play Communication: Full Disclosure," Econometrica, Econometric Society, vol. 82(3), pages 1093-1131, May.

    More about this item

    Keywords

    price discrimination; communication; bargaining; commitment; evidence; network flows;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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