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Collusion-Proof Mechanism Design in Two-Agent Nonlinear Pricing Environments

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  • Meng, Dawen
  • Tian, Guoqiang

Abstract

This paper studies the cost requirement for two-agent collusion-proof mechanism design. Unlike the existing results for general environments with three or more agents, it is shown that collusive behavior cannot be prevented freely in two-agent nonlinear pricing environments with correlated types. Reporting manipulation calls for distortions away from the first-best efficiency, and arbitrage calls for further distortion. Moreover, we show that the distortionary patterns are quite different for positive and negative correlations. The second-best outcome is attainable as negative correlation is vanishing, while the limit of collusion-proof efficiency is strictly lower than the second-best level as positive correlation goes to zero. Allowing arbitrage therefore breaks the continuity between correlated and uncorrelated types.

Suggested Citation

  • Meng, Dawen & Tian, Guoqiang, 2014. "Collusion-Proof Mechanism Design in Two-Agent Nonlinear Pricing Environments," MPRA Paper 57931, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:57931
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    References listed on IDEAS

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    More about this item

    Keywords

    Nonlinear pricing; collusion-proof; mechanism design; arbitrage; correlation;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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