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Dynamic Screening with Limited Commitment

  • Rahul Deb
  • Maher Said

We examine a model of dynamic screening and price discrimination in which the seller has limited commitment power. Two cohorts of anonymous, patient, and risk-neutral buyers arrive over two periods. Buyers in the first cohort arrive in period one, are privately informed about the distribution of their values, and then privately learn the value realizations in period two. Buyers in the second cohort are ``last-minute shoppers'' that already know their values upon their arrival in period two. The seller can fully commit to a long-term contract with buyers in the first cohort, but cannot commit to the future contractual terms that will be offered to second-cohort buyers. The expected second-cohort contract serves as an endogenous type-dependent outside option for first-cohort buyers, reducing the seller's ability to extract rents via sequential contracts. We derive the seller-optimal equilibrium and show that the seller mitigates this effect by inducing some first-cohort buyers to strategically delay their time of contracting---the seller manipulates the timing of contracting in order to endogenously generate a commitment to maintaining high future prices. The seller's optimal contract pools low types, separates high types, and induces intermediate types to delay contracting.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-485.

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Date of creation: 09 May 2013
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Handle: RePEc:tor:tecipa:tecipa-485
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