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Optimal Monopoly Mechanisms with Demand Uncertainty

Author

Listed:
  • James Peck

    (Department of Economics, Ohio State University, Columbus, Ohio 43210)

  • Jeevant Rampal

    (Economics Area, Indian Institute of Management Ahmedabad, Ahmedabad, Gujarat 380015, India)

Abstract

This paper analyzes a monopoly firm’s profit-maximizing mechanism in the following context. There is a continuum of consumers with a unit demand for a good. The distribution of the consumers’ valuations is given by one of two possible demand distributions/states. The consumers are uncertain about the demand state, and they update their beliefs after observing their own valuation for the good. The firm is uncertain about the demand state but infers it from the consumers’ reported valuations. The firm’s problem is to maximize profits by choosing an optimal mechanism among the class of anonymous, deterministic, direct revelation mechanisms that satisfy interim incentive compatibility and ex post individual rationality. We show that, under certain sufficient conditions, the firm’s optimal mechanism is to set the monopoly price in each demand state. Under these conditions, Segal’s optimal ex post mechanism is robust to relaxing ex post incentive compatibility to interim incentive compatibility.

Suggested Citation

  • James Peck & Jeevant Rampal, 2021. "Optimal Monopoly Mechanisms with Demand Uncertainty," Mathematics of Operations Research, INFORMS, vol. 46(4), pages 1413-1429, November.
    • Handle: RePEc:inm:ormoor:v:46:y:2021:i:4:p:1413-1429
    DOI: 10.1287/moor.2020.1120
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