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The Market for Surprises: Selling Substitute Goods Through Lotteries

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  • Filippo Balestrieri
  • Sergei Izmalkov
  • Joao Leao

Abstract

In this paper, we solve the revenue maximization problem of a multi-product monopolist when the products are substitutes. We consider a Hotelling model with two horizontally differentiated goods located at the endpoints of the segment. Consumers are located uniformly on the segment; their valuations for each good are equal to the base consumption value minus distance costs. When the base consumption value is high, the seller maximizes her expected profit by offering a menu of base and opaque goods. In particular, a single half-half lottery over base goods is optimal under concave and linear costs. When base consumption value is low, only base goods are sold. Finally, when base consumption value is intermediate, the optimal mechanism may entail the offering of lotteries with the positive probability of no delivery. Our findings can explain the emergence of opaque goods sales (e.g., hotel bookings without a complete description of the hotel through hotwire.com or priceline.com) as the outcome of the industry’s search for the optimal selling scheme.

Suggested Citation

  • Filippo Balestrieri & Sergei Izmalkov & Joao Leao, 2021. "The Market for Surprises: Selling Substitute Goods Through Lotteries," Journal of the European Economic Association, European Economic Association, vol. 19(1), pages 509-535.
  • Handle: RePEc:oup:jeurec:v:19:y:2021:i:1:p:509-535.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvaa021
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    Cited by:

    1. Bernard, Christophe & Mitraille, Sébastien, 2023. "Outsourcing horizontally differentiated tasks under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    2. Piolatto, A. & Schuett, Florian, 2022. "Information vs Competition : How Platform Design Affects Profits and Surplus," Discussion Paper 2022-002, Tilburg University, Tilburg Law and Economic Center.
    3. Emanuele Bacchiega & Elias Carroni & Alessandro Fedele, 2023. "Monopolistic Duopoly," BEMPS - Bozen Economics & Management Paper Series BEMPS101, Faculty of Economics and Management at the Free University of Bozen.
    4. Schäfers, Sebastian, 2022. "Product Lotteries and Loss Aversion," Working papers 2022/06, Faculty of Business and Economics - University of Basel.

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