Optimal sales mechanism with outside options

Dongkyu Chang

Journal of Economic Theory, 2021, vol. 195, issue C

Abstract: This paper studies the optimal design of sales mechanisms when a buyer can quit a negotiation for an outside option at any time. The main results show that the profit-maximizing mechanism induces a set of buyer types to delay purchasing a good if the value of the outside option is highly dispersed among buyer types. Moreover, to prevent a buyer from quitting a negotiation, the profit-maximizing mechanism also features an upfront payment, which is compensated later by a price discount. The seller can implement the profit-maximizing mechanism by offering a declining price path or a menu of European options.

Keywords: Delay; Option contract; Outside option; Upfront payment; Quitting right (search for similar items in EconPapers)
JEL-codes: C78 D82 D86 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002205312100096X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:195:y:2021:i:c:s002205312100096x

DOI: 10.1016/j.jet.2021.105279

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().