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Price Discrimination Through Communication

Author

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  • Itai Sher
  • Rakesh Vohra

Abstract

We study a seller's optimal mechanism for maximizing revenue when the buyer may present evidence relevant to the buyer's value, or when different types of buyer have a differential ability to communicate. We introduce a dynamic bargaining protocol in which the buyer first makes a sequence of concessions in a cheap talk phase, and then at a time determined by the seller, the buyer presents evidence to support his previous assertions, and then the seller makes a take-it-or-leave-it offer. Our main result is that the optimal mechanism can be implemented as a sequential equilibrium of our dynamic bargaining protocol. Unlike the optimal mechanism to which the seller can commit, the equilibrium of the bargaining protocol also provides incentives for the seller to behave as required. We thereby provide a natural procedure whereby the seller can optimally price discriminate on the basis of the buyer's evidence. JEL Code: C78, D82, D83.

Suggested Citation

  • Itai Sher & Rakesh Vohra, 2011. "Price Discrimination Through Communication," Discussion Papers 1536, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1536
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    References listed on IDEAS

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    Cited by:

    1. Elchanan Ben-Porath & Eddie Dekel & Barton L. Lipman, 2014. "Optimal Allocation with Costly Verification," American Economic Review, American Economic Association, vol. 104(12), pages 3779-3813, December.
    2. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2017. "Optimal Allocation with Ex Post Verification and Limited Penalties," American Economic Review, American Economic Association, vol. 107(9), pages 2666-2694, September.
    3. Sebastian Schweighofer-Kodritsch & Roland Strausz, 2023. "Principled Mechanism Design with Evidence," Berlin School of Economics Discussion Papers 0030, Berlin School of Economics.
    4. Sher, Itai & Vohra, Rakesh, 2015. "Price discrimination through communication," Theoretical Economics, Econometric Society, vol. 10(2), May.
    5. Elchanan Ben‐Porath & Eddie Dekel & Barton L. Lipman, 2019. "Mechanisms With Evidence: Commitment and Robustness," Econometrica, Econometric Society, vol. 87(2), pages 529-566, March.
    6. Mehdi Ayouni & Frédéric Koessler, 2017. "Hard evidence and ambiguity aversion," Theory and Decision, Springer, vol. 82(3), pages 327-339, March.
    7. S Nageeb Ali & Greg Lewis & Shoshana Vasserman, 2023. "Voluntary Disclosure and Personalized Pricing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(2), pages 538-571.
    8. ,, 2014. "Persuasion and dynamic communication," Theoretical Economics, Econometric Society, vol. 9(1), January.
    9. Frédéric Koessler & Eduardo Perez-Richet, 2019. "Evidence reading mechanisms," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(3), pages 375-397, October.
    10. Herweg, Fabian & Schmidt, Klaus M., 2020. "Bayesian implementation and rent extraction in a multi-dimensional procurement problem," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    11. Jeanne Hagenbach & Frédéric Koessler & Eduardo Perez‐Richet, 2014. "Certifiable Pre‐Play Communication: Full Disclosure," Econometrica, Econometric Society, vol. 82(3), pages 1093-1131, May.
    12. Sumit Goel & Wade Hann-Caruthers, 2020. "Project selection with partially verifiable information," Papers 2007.00907, arXiv.org, revised Feb 2022.
    13. repec:spo:wpmain:info:hdl:2441/3709dm0u7h9t9qlfe9vrqtn8ed is not listed on IDEAS
    14. Nima Haghpanah & Ron Siegel, 2022. "A Theory of Stable Market Segmentations," Papers 2210.13194, arXiv.org.
    15. Chen, Yi-Chun & Li, Jiangtao, 2018. "Revisiting the foundations of dominant-strategy mechanisms," Journal of Economic Theory, Elsevier, vol. 178(C), pages 294-317.
    16. Francisco Silva, 2020. "Self-evaluations," Documentos de Trabajo 554, Instituto de Economia. Pontificia Universidad Católica de Chile..
    17. Geoffrey A. Chua & Gaoji Hu & Fang Liu, 2023. "Optimal multi-unit allocation with costly verification," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 61(3), pages 455-488, October.
    18. Raymond Deneckere & Sergei Severinov, 2022. "Signalling, screening and costly misrepresentation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(3), pages 1334-1370, August.
    19. repec:hal:spmain:info:hdl:2441/3709dm0u7h9t9qlfe9vrqtn8ed is not listed on IDEAS
    20. repec:hal:spmain:info:hdl:2441/4kpa2fek478tla1o86g6n9jb6v is not listed on IDEAS
    21. repec:spo:wpmain:info:hdl:2441/4kpa2fek478tla1o86g6n9jb6v is not listed on IDEAS
    22. Kym Pram, 2023. "Learning And Evidence In Insurance Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1685-1714, November.
    23. repec:hal:pseose:halshs-01053478 is not listed on IDEAS
    24. Pram, Kym, 2021. "Disclosure, welfare and adverse selection," Journal of Economic Theory, Elsevier, vol. 197(C).

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    More about this item

    Keywords

    price discrimination; communication; bargaining; commitment; evidence; network flows;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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