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How do selling mechanisms affect profits, surplus, capacity and prices with unknown demand?

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  • Patrick Hummel

Abstract

I analyze a model in which a seller wishes to sell multiple homogeneous goods to a large group of buyers with unknown demand. The seller may either sell objects via a posted-price mechanism, a discriminatory-price auction, a uniform-price auction, their open-bid analogs, or a revelation mechanism in which the seller first asks all potential buyers to report their valuations and then sets a reserve price. I show that the revelation mechanism leads to the greatest profits, the auction mechanisms result in identical expected profits and the posted-price mechanism results in the smallest profits. However, the more profitable mechanisms impose stronger informational requirements that may make these mechanisms infeasible in practice, and the posted-price mechanism also results in the greatest total surplus. I also find the seller chooses a lower capacity and reserve price in an auction than in the posted-price mechanism.

Suggested Citation

  • Patrick Hummel, 2018. "How do selling mechanisms affect profits, surplus, capacity and prices with unknown demand?," Canadian Journal of Economics, Canadian Economics Association, vol. 51(1), pages 94-126, February.
    • Handle: RePEc:cje:issued:v:51:y:2018:i:1:p:94-126
    DOI: 10.1111/caje.12317
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    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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