Paper #624

Title:

Optimal second-degree price discrimination and arbitrage: On the role of asymetric information among buyers

Authors:

Doh Shin Jeon and Domenico Menicucci

Date:

November 2001 (Revised: January 2005)

Abstract:

The traditional theory of monopolistic screening tackles individual self-selection but does not address the possibility that buyers could form a coalition to coordinate their purchases and to reallocate the goods. In this paper, we design the optimal sale mechanism which takes into account both individual and coalition incentive compatibility focusing on the role of asymmetric information among buyers. We show that when a coalition of buyers is formed under asymmetric information, the monopolist can do as well as when there is no coalition. Although in the optimal sale mechanism marginal rates of substitution are not equalized across buyers (hence there exists room for arbitrage), they fail to realize the gains from arbitrage because of the transaction costs in coalition formation generated by asymmetric information.

Keywords:

Monopolistic screening, coalition incentive compatibility, asymetric information, transaction costs

JEL codes:

D42, D82

Area of Research:

Microeconomics

Published in:

Rand Journal of Economics, vol. 36 (2), 337-360, Summer 2005

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