Monopolistic Group Design with Peer Effects

Working Papers from University of Toronto, Department of Economics

Abstract: In a range of settings, private firms manage peer effects by sorting agents into different groups, be they schools, neighbourhoods or teams. This paper considers such a firm, which controls group entry by setting a series of anonymous prices. We show that private provision systematically leads to two distortions relative to the efficient solution: first, agents are segregated too finely; second, too many agents are excluded from all groups. We demonstrate that these distortions are a consequence of anonymous pricing and do not depend upon the nature of the peer effects. This general approach also allows us to assess the way the `returns to scale' of peer technology and the cost of group formation affect the optimal group structure.

Keywords: mechanism design; peer effects; public goods (search for similar items in EconPapers)
JEL-codes: D82 H40 L12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic, nep-pbe and nep-ure
Date: Written 2007-01-14
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