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Theory/Experimental Seminar - Christopher Sandmann (LSE)

13 December 2022, 1:30 pm–3:00 pm

Drayton House

When Are Single-Contract Menus Profit-Maximizing?

Event Information

Open to

All

Organiser

Deniz Kattwinkel

This paper revisits the canonical screening problem due to Mussa and Rosen (1978): A seller proposes a

menu of price-quality (or quantity) contracts so that buyers of distinct valuations purchase distinct varieties.

While menu pricing is feasible in their model, a result by Stokey (1979) implies that sometimes it is profitmaximizing to offer a single take-it-or-leave-it contract instead. In this article, I identify conditions that tell the optimality of separation and single-contract menus apart. I show that the profit-maximizing menu consists of a single contract if the surplus function (utility minus cost) is more concave in quality for higher types. This result holds irrespective of the distribution of buyer types. The condition is akin to saying that higher buyer

types’ surplus-utility represents more risk-averse preferences over quality. Since the converse is also true, it follows that single-contract menus are profit-maximizing only if the first-best quality assignment is identical for all buyers, as is the case for information goods. Finally, I prove a (partial) generalization that applies when there are common values and contrast my findings with menu pricing in competitive environments.

Location: 321 Drayton House or via Zoom

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